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| ![               | **Public Housing Authorities Directors            |
| ](media/image1.w | Association**                                     |
| mf){width="1.469 |                                                   |
| 4444444444446in" | 511 Capitol Court, NE, Washington, DC 20002-4937  |
| h                |                                                   |
| eight="0.675in"} | phone: 202-546-5445 fax: 202-546-2280             |
|                  | www.phada.org                                     |
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Rules Docket Clerk

Office of the General Counsel

Department of Housing and Urban Development

451 South 7^th^ Street, SW

Room 10276

Washington DC 20410-0001

September 12, 2007

**RE: Docket Number FR-4843-P-01**

**Use of Public Housing Capital and Operating Funds for Financing
Activities**

On July 18, 2007 the Department of Housing and Urban Development
published a proposed rule that would make changes in 24 CFR, Parts 905
and 990 that would allow public housing authorities to use proceeds
under either the Capital Fund or Operating Fund programs for financing
activities. Agency activities that could be financed by pledging future
proceeds include the payments of debt service and customary financing
costs associated with the modernization and development of public
housing, as well as, public housing in mixed-finance development. On
behalf of its approximate 1,900 member agencies, the Public Housing
Authorities Directors Association (PHADA) submits the following comments
concerning the proposed rule.

[Summary]{.underline}

PHADA is confounded by the timing of this proposed rule. The rule is
meant to "enhance capital improvement planning and the public housing
program transition to asset management decision-making" by establishing
requirements and procedures for PHAs to request authorization from HUD
to pledge its assets. While PHADA has consistently urged HUD to allow
more flexibility in financing capital improvements, this initiative
appears to be too little, too late. This guidance is being promulgated
as a result of the passage of the Quality Housing and Work
Responsibility Act of 1998 (Public Law 105-276) almost ten years ago. In
the interceding years much has changed for housing authorities including
implementation of Asset Management and serial cuts to both Operating and
Capital Fund programs. While this proposed funding tool may well be
welcomed and useful to some public housing authorities, it comes at a
time of severe funding cuts, uncertainty and change. Housing authorities
that are most likely to find this new capability helpful will be those
agencies already leveraging their resources through HOPE VI,
demolition/disposition, Moving to Work and voluntary conversions. It
will also serve those authorities that have healthy reserves and/or
streams of excess operating or capital funds.

PHADA cannot help but think that the new financing flexibility offered
up by this rule would have been more welcomed and useful several years
ago before housing authorities had to contend with successive funding
cuts. Six years of severe under funding has taken its toll on the
affordable housing marketplace, in general, and on public housing
authorities, in particular. Many housing authorities are in weaker
financial positions than they were in 2000. This weaker position might
make it more difficult to structure optimal financing agreements or to
attract private lending partners.

This rule will likely have limited use among smaller housing
authorities, those with large proportions of obsolete, aged or
deteriorated units or those without excess capital or operating streams.
PHADA would like HUD to consider special initiatives to help these
smaller agencies reposition their housing assets so they can remain
vital affordable housing resources in their communities. Smaller
agencies typically have very limited staff capacity for planning,
development or financing activities.

[Borrowing relationships must be between lenders and housing
authorities]{.underline}

HUD seems to be making the case for individual, stand-alone projects to
be the borrowing entity in these capital improvement financial
transactions. While individual projects can be the target of a financial
transaction, the actual transaction must be between the bank and a
qualified legal entity -- the housing authority. Banks can neither
adequately underwrite the subject loan nor meet their regulatory
requirements without a qualified borrowing entity. A single housing
authority project would be unable to demonstrate to a lender such
qualifications as audited financial statements, reputation, track record
and development capacity. Individual projects will not have lender
relationships or be listed by Dunn & Bradstreet or any other business
rating service. Nor will the individual project have deep enough pockets
to secure any lender's risk position.

Sound fiscal management demands that borrowing relationships and
activity be vested at the authority level so that financing activities
occur in a strategic fashion under the control of the executive director
and the board of directors. Projects within any housing authority
portfolio will have various levels of capital needs improvement that
generate borrowing and repayment schedules requiring careful
coordination and continuous monitoring.

Lenders cannot view public housing authorities or their stand-alone
projects like market-rate apartment financing. Market-rate apartments
are driven entirely by rent revenues and higher-than-break-even
occupancy levels. Public housing whether individual projects or
authority wide, serves a population that is not bankable based on rent
revenue. Bankers make lending decisions on public housing and pin their
repayment hopes on three key factors in the following order of
importance: 1.) the reliability of federal funding to close the gap
between what poor renters pay (actual rent revenue) and what it costs to
operate the subject property for the term of the loan; 2.) the
relationship, reputation and track record of the borrowing housing
authority, and, 3.) the subject property and its ability to maintain
adequate occupancy for the life of the loan.

HUD seems intent on forcing the financing of public housing into the
private apartment model when public and private housing reside on
opposite ends of the financing spectrum.

[Future fungibility within the portfolio]{.underline}

The continued fungibility among projects seems threatened by the
proposed rule. Housing authorities use the flexibility provided by
fungibility to keep properties operating in the black. This is
accomplished by transferring funds from properties with excess funds to
properties with deficits. The HUD proposal to isolate financing to
individual properties seems to preclude this practice of sharing
resources across authorities' entire portfolios. This practice has
effectively kept financially weaker properties in service for low-income
households. Under the proposed rule, for example, operating funds must
be project specific. Further, both Operating and Capital Fund financing
requires 3.0 debt service coverage, which PHADA assumes must be in place
for the life of the borrowing, and a restricted fund with 12 months of
debt service payments. These requirements will likely tie up more
authority funds in the subject property and make less available to share
among other projects in the portfolio.

[FACA meeting in 2009]{.underline}

Another timing issue related to the tardiness of this rule is the
approaching Federal Advisory Committee Act (FACA) meeting. It is not
inconceivable that when the FACA convenes in 2009 "to review the
methodology to evaluate the PEL based on actual cost data" that it might
result in yet more unforeseen changes that public housing authorities
will need to take into account before entering into leveraging
agreements under this guidance.

One way to take the unknowns related to the FACA process out of the
lending equation is for HUD to establish parameters that set income for
the subject project for the term of borrowing under this provision. With
the energy performance contracting (EPC) program as a model, HUD could
freeze rental income, PELs and UELs on the date of a loan agreement,
thereby giving assurances to the lending community of timely and
reliable loan repayment. These frozen income streams would act as credit
enhancers and lower the need for additional credit enhancers and
performance requirements that could drive up borrowing costs.

[HUD shifts capital funding responsibility and risk to housing
authorities]{.underline}

HUD has not seen fit to advocate for full funding of the Operating Fund
even as housing authorities continue to face low and stagnant rents
against a backdrop of rising operating costs related to significant
increases in energy, insurance and healthcare. Add in the cost burden
related to the transition to Asset Management and it is easy to see a
business case for federal funding levels that reflect these marketplace
realities. Instead of providing adequate funding, HUD imposed deep cuts
that forced housing authorities to shrink staff, services and security.
This pattern of funding shortfalls will likely impact how lenders view
and underwrite any borrowing requests.

In like fashion, HUD has been unwilling to physically maintain public
housing as an important portion of the nation's public infrastructure.
HUD has passively stood by and allowed an enormous \$22 billion backlog
of capital improvement needs to accumulate. As yet another indicator of
its lack of interest in the long-term viability of public housing, HUD
is now shifting funding responsibility for America's affordable housing
infrastructure from the commonweal to the very housing authorities
weakened by successive years of HUD disinvestment.

Private lenders will be hard pressed to mitigate the risk described in
the proposed rule as "appropriations risk" especially in light of HUD's
recent reluctance to support adequate funding levels from the Congress.
Lenders seek out loan opportunities to borrowers where net operating
income is trending upward over time. Conversely, lenders tend to avoid
lending to entities whose income sources are trending downward. Housing
authorities are essentially grantees who rely on HUD to fund the income
gap created by public housing authority rental income and the actual
cost of operating well-managed public housing. Lenders will, of
necessity, evaluate the soundness of specific development projects, the
reputation and development capacity of the housing authority
[and]{.underline} the reliability of HUD to continue to fund the income
gap.

[Private apartment financing vs. PHA apartment financing]{.underline}

Banks view apartments as income-producing properties and as such, treat
the financing of those apartments as market-driven credit facilities
based on rent revenue. Loans are repaid through rent receipts and
secured by the underlying real estate. This straight forward commercial
real estate lending model provides the lender with both collateral and
one or more identified repayment sources.

Housing authorities, on the other hand, represent a special lending
challenge to banks. Public housing authorities, generally, cannot
provide the apartments subject to the loan as collateral. And rent
receipts of low-, very low- and extremely low-income tenants are
inadequate for debt service. While banks prefer collateral and one or
two identified repayment sources, they can often craft affordable,
attractive loans based on trusted, reliable partners that might include
only a single repayment source. That single source of repayment must
necessarily be reliable and available for the life of the loan. The
challenge of underwriting single source loans to housing authorities is
the arbitrary nature of federal funds for public housing as demonstrated
in recent years.

[HUD as bankable partner]{.underline}

HUD's recent funding trends show sharp year-to-year reductions in both
the Operating Fund and Capital Fund. Where banks look for steady growth
to support loan repayment schedules, they find instead diminishing
returns from HUD to their borrowers. Lenders will need to make some
estimate as to HUD's reliability as a funding source in order to
underwrite loans allowed by this rule. The rule allows a PHA to pledge
up to "33 percent of its annual capital fund grant for debt service
payments, assuming level capital fund Congressional appropriations over
the term of the debt obligation and any reduction attributable to
activities projected by the PHA..." This assumption of "level capital
fund Congressional appropriations" defies recent history and seems to be
poor criteria for basing loan repayments. To avoid originating "watch
list" loans, lenders will likely take a more conservative approach and
assess loans on actual funding streams. Lenders will also need to
establish terms and conditions to mitigate lending risks presented by
the uneven HUD funding stream. These risk mitigators could mean higher
fees, additional credit enhancers or higher performance standards for
housing authorities, thereby producing more costs related to financing
capital improvements.

[Banking on HUD's commitment to the poor]{.underline}

Banks and housing authorities recognize that HUD's fundamental role in
public housing is to close the gap between what poor households can
afford to pay for rent and the actual cost of safe, decent and secure
housing. HUD has been balking at paying the real cost of that sizeable
funding gap. Housing authorities and private lenders are not equipped to
fill this funding gap and must continue to look to HUD as the primary
funder of public housing operating and capital improvement needs.
Lenders that wish to help housing authorities and HUD finance a portion
of these needs will need to use its due diligence responsibility to
mitigate the relative risk of lending to housing authorities that have
suffered successive years of under funding, may have limited reserves
and are subject to unparalleled levels of regulatory burden. HUD's
recent funding behavior will not have much currency in the private
lending industry and will likely raise the specter of higher risk and
thus higher borrowing costs.

[Three levels of risk assessment]{.underline}

This proposed rule points three levels of risk assessment for capital
improvement borrowing under the rule. First there is the "appropriations
risk" when Congress will fail to provide adequate funding as a result of
HUD's lack of advocacy for the Capital Fund and Operating Fund programs.
Secondly, there is the agency risk as demonstrated to HUD by
requirements for annual and 5-year plans, the financing proposal, PHAS
scores, management capacity, physical needs assessment, fairness opinion
and construction management capacity. And third, the project risk for
completion, marketability, timely rent-up and cash flow. While HUD looks
to agencies for numerous and excessive reporting requirements, lenders
will focus on capable agencies only to the extent that they can deliver
projects on time, secure certificates of occupancy and rent up quickly
so cash flow (debt and equity) is triggered and repayment begins. PHADA
would like to see HUD reporting requirements proportional to HUD's
financial stake in the proposed project. If HUD is bringing fewer
financial resources to the project than the private lenders, lender
terms and conditions should frame the project. HUD submission
requirements seem to be regulatory overkill even if HUD was fully
funding a project, and thoroughly inappropriate when private lenders are
the major sources of funds. HUD could take this opportunity to adopt a
more business-like approach to partnering with the private sector.

[Housing authorities borrowing from the future]{.underline}

While a business case can be made for pledging capital fund proceeds,
PHADA sees less value in encouraging housing authorities to pledge
future operating funds for capital improvements. While some uniquely
situated housing authorities with streams of excess operating funds are
able to leverage private funds, most agencies will need to be extremely
cautious pledging operating funds. Eliminating future cash flow is
rarely viewed as a business-like approach of healthy, economically
viable organizations. Private lenders would seriously question the
long-term viability of a borrower limiting future income and economic
opportunities. Trading income for debt rarely makes sense because it is
prone to shortening the life of the institution. In this era of huge
federal deficits, a widening mortgage financing crisis and deep and
damaging HUD funding cuts such borrowing activity would seem ill
advised.

[Conclusion]{.underline}

PHADA continues to look to HUD to develop workable financing mechanisms
that will help public housing authorities address the \$22 billion
backlog of capital improvement needs. Unfortunately, this backlog is the
result of years of deep funding cuts. This dismal funding trend and
HUD's apparent lack of advocacy on behalf of very-low and extremely
low-income residents of public housing sends a confused message to the
private lending community. Private lenders can only do so much in
financing public housing capital improvements, especially when key
partners seem somewhat uncommitted. Leveraged financing under this
proposal still relies on HUD to remain a reliable funding partner on the
significant unbankable portion of public housing operations -- the rent
revenue/operating costs gap. HUD must continue to provide adequate
Operating and Capital Funds to insure safe, secure and decent public
housing and to lure leveraged private capital.

![](media/image2.png){width="1.625in"
height="1.2958333333333334in"}Sincerely,

Tim Kaiser

Executive Director