```
                                                                 
Multifamily Rural Housing: Prepayment Potential and Long-Term	 
Rehabilitation Needs for Section 515 Properties (10-MAY-02,	 
GAO-02-397).							 
                                                                 
Nearly 450,000 elderly and other households depend on federal	 
assistance to live in multifamily rural rental properties that	 
were constructed with subsidized federal loans. Because the	 
properties were built in areas when and where privately financed 
housing units, affordable by lower income households, were not	 
considered economically feasible, the U.S. Department of	 
Agriculture's (USDA)Rural Housing Service (RHS) has made direct  
loans available to developers of affordable multifamily housing  
under its section 515 program. RHS has funded many more new	 
properties than the portfolio has lost through prepayment. The	 
number of new properties added to the portfolio exceeded the	 
number that left the program after prepayment in every year	 
except 2001. If the statutory requirement restricting prepayment 
for loans made before December 15, 1989, were changed to allow	 
prepayment without restrictions after 20 years from the date of  
the loan, prepayment could be an option for the owners of 3,900  
of all section 515 properties over the next eight years. RHS	 
field staff routinely inspect properties, complete and retain	 
detailed descriptions of noted deficiencies, and transmit the	 
summaries of the deficiencies identified to a central database.  
Only current deficiencies are identified, however, so the data is
of only limited value for determining the cost of the long term  
rehabilitation needs of individual properties.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-397 					        
    ACCNO:   A03252						        
  TITLE:     Multifamily Rural Housing: Prepayment Potential and      
Long-Term Rehabilitation Needs for Section 515 Properties	 
     DATE:   05/10/2002 
  SUBJECT:   Federal aid for housing				 
	     Housing programs					 
	     Low income housing 				 
	     Rural housing programs				 
	     Subsidies						 
	     Direct loans					 
	     RHS Section 515 Program				 

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GAO-02-397
     
Report to the Chairwoman, Subcommittee on Housing and Community Opportunity,
Committee on Financial Services House of Representatives

United States General Accounting Office

GAO

May 2002 MULTIFAMILY RURAL HOUSING

Prepayment Potential and Long- Term Rehabilitation Needs for Section 515
Properties

GAO- 02- 397

Page 1 GAO- 02- 397 Multifamily Rural Housing

May 10, 2002 The Honorable Marge Roukema Chairwoman, Subcommittee on Housing

and Community Opportunity Committee on Financial Services House of
Representatives

Dear Madam Chairwoman: Nearly 450,000 elderly and other households depend on
federal assistance to live in multifamily rural rental properties that were
constructed with subsidized federal loans. With an average income of $8,105
in 2001, over 90 percent of these households are at or below 50 percent of
the median income in the areas where they are located. Because the
properties were built in areas when and where privately financed housing
units, affordable by lower income households, were not considered
economically feasible, the U. S. Department of Agriculture?s (USDA) Rural
Housing Service (RHS) has made direct loans with subsidized interest rates
as low as 1 percent available to developers of affordable multifamily
housing under its section 515 program. 1 The properties often receive
project- based rental assistance in addition to the interest subsidies. 2 As
of March 1, 2002, about 16,400 section 515 properties had an outstanding
principal balance of $11.8 billion.

When the section 515 program began in the early 1960s, loans were generally
made for 40 years, but borrowers were encouraged to refinance their
properties as soon as they could obtain private credit. Refinancing the
properties released the owners from the requirements in their loan contracts
on admission and rents, allowing some to raise rents to market levels when
they prepaid their section 515 loans. But prepayment of these loans also
removed units that were affordable to low- income tenants from RHS?s
portfolio. Concerns about the loss of affordable units led Congress to enact
legislation designed to keep section 515 properties in the portfolio for a
longer time and to protect low- income tenants from being displaced.

1 The program was authorized by a 1962 amendment to the Housing Act of 1949
(42 U. S. C. 1485). 2 Under project- based assistance the subsidy is tied to
the unit and the household can benefit from the subsidy only while living in
the subsidized unit.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 397 Multifamily Rural Housing

Congress ultimately enacted legislation that precluded prepayment for loans
made on or after December 15, 1989. For loans made before that date,
prepayment is restricted.

As agreed with your office, this report covers (1) the number of properties
whose section 515 loans have been prepaid and the effect of prepayment on
the section 515 portfolio; (2) the estimated impact on the number of
properties in the portfolio by changing the legislation that restricted
prepayment for loans made before December 15, 1989, and; (3) the longterm
rehabilitation needs of the properties in the section 515 portfolio.

Our work is based on reviews of agency and published data; analyses of data
from three RHS accounting systems; and discussions with industry
representatives, Department of Housing and Urban Development (HUD)
officials, and RHS headquarters and state officials. We were unable to
survey property owners about their prepayment intentions because the RHS
database is not designed to readily match owner and property location data.
However, we were able to measure factors that RHS and industry
representatives believe limit the potential for prepaying. We were also able
to identify additional factors that are likely to impact prepayment, but we
could not measure them without performing in- depth financial analyses of
individual properties. We performed our work from June 2001 through March
2002 in accordance with generally accepted government auditing standards.
Additional details on our scope and methodology are discussed in appendix I.

Prepayment activity has been minimal and has removed a small percentage of
properties from the section 515 portfolio. RHS has funded many more new
properties than the portfolio has lost through prepayment. Since the program
began, the number of new properties added to the portfolio exceeded the
number that left the program after prepayment in every year except 2001. In
that year, the balance changed because of a continued decline in funding
rather than a significant increase in prepayment activity.

If the statutory requirement restricting prepayment for loans made before
December 15, 1989, were changed to allow prepayment without restrictions
after 20 years from the date of the loan, we estimate that prepayment could
be an option for the owners of about 3,900, or about 24 percent, of all
section 515 properties over the next 8 years. Owners of about 950 of these
properties would immediately become eligible to prepay. This estimate is
based on our analysis of economic factors that we Results in Brief

Page 3 GAO- 02- 397 Multifamily Rural Housing

could measure and that RHS and industry representatives agree would limit
the potential for prepayment and conversion to market- rate rents. However,
several factors that we could not readily measure would likely reduce the
potential for prepayment even further. To this end, individual properties
must be able to operate without federal assistance, be in areas where high
rental demand has raised market rents above RHS rents, have the funds or
financing to meet future capital needs, and meet any tax requirements. Yet,
despite these potential constraints on prepayment, RHS officials are
concerned that owners who are dissatisfied with RHS?s procedures and
statutory restrictions could apply to leave the program if the opportunity
to do so arose, even when economic factors would not make them likely to
depart. RHS officials believe that planned enhancements to their management
systems by the summer of 2002 will allow them to better measure some of
these variables and more accurately predict prepayment potential.

While RHS is concerned with the capital replacement needs of a rapidly aging
portfolio, routine inspections do not produce a cost estimate of the long-
term rehabilitation needs of the properties in its portfolio. RHS field
staff routinely inspect properties, complete and retain detailed
descriptions of noted deficiencies, and transmit the summaries of the
deficiencies identified to a centralized database. However, only current
deficiencies are identified; therefore, the data are of limited value for
determining the cost of long- term rehabilitation needs of the individual
properties. Without a mechanism to prioritize the portfolio?s long- term
rehabilitation needs, RHS cannot be sure it is spending limited
rehabilitation funds as effectively as possible and cannot tell Congress how
much funding it will need in the future. RHS has been only able to provide a
wide range of estimates on the amount of funding needed, ranging from $800
million to $3.2 billion. We are recommending that RHS undertake a
comprehensive assessment of the section 515 portfolio?s capital and
rehabilitation needs, use the results to set priorities for the portfolio?s
immediate rehabilitation requirements, and provide Congress with an estimate
of the portfolio?s long- term rehabilitation needs. RHS officials agreed
with the recommendation, acknowledging the need to focus on developing
strategies to address the portfolio?s rehabilitation needs. While noting
that RHS knows the physical condition of individual properties, this
information has not been consolidated into a national database that can be
used to develop credible cost estimates of the portfolio?s long- term needs.

Page 4 GAO- 02- 397 Multifamily Rural Housing

As shown in figure 1, expenditures for the section 515 program increased
throughout the 1970s, peaked in 1979, and fell sharply after that. In recent
years, the program has received about $115 million annually and has
allocated $55 million for new construction, $55 million for rehabilitation,
and $5 million for equity loans. The president?s budget for fiscal year 2003
proposes to eliminate the new construction funding.

Figure 1: Section 515 Expenditures, 1963- 2001

Source: GAO analysis of RHS data.

The number of units added to the portfolio each year has followed the
funding curve. During the peak funding years, over 20,000 new units were
added to the portfolio annually. Fewer than 5,000 new units have been
produced annually since 1995. Background

Page 5 GAO- 02- 397 Multifamily Rural Housing

In 1998, RHS created the Office of Rental Housing Preservation to administer
the prepayment program. Mandated in the Housing and Community Development
Act of 1992, the office?s tasks include improving the effectiveness and
integrity of the agency?s prepayment and preservation processes.

As of fiscal year 2001, the average size of an RHS property was 27 units.
About 8 percent of the properties, comprising about 5 percent of the units,
were owned by small operators, often families, while most of the other
properties had a more complex ownership structure- typically a managing
partner, who owned 5 percent of the property, and many limited partners with
smaller shares.

About half of the section 515 units receive RHS rental assistance, which
makes up the difference between 30 percent of the assisted household?s
income and the unit?s rent. About 14 percent of section 515 units have HUD
project or tenant- based section 8 rental subsidies, which cover the
difference between tenants? payments and fair- market rents, as determined
by HUD on the basis of an annual survey of rents in over 2,700 market areas.
Therefore, in those areas where fair- market rents are typically higher than
the rents approved by RHS, section 515 properties with section 8 assistance
usually generate more income for the owners. Both RHS and HUD provide
project- based rental assistance, meaning that the assistance stays with the
unit. HUD?s section 8 voucher program provides tenant- based vouchers,
meaning that the assistance stays with the tenant and is portable-
households can use vouchers to rent any affordable units that meet HUD?s
housing quality standards.

In the program?s early years, it was expected that the original loans, which
are amortized over 40 or 50 years, would be refinanced before major
rehabilitation was needed. However, with prepayment restrictions and limited
rental assistance and rehabilitation funds, this original expectation has
not been realized. To maintain the properties in good condition, RHS relies
on owners to put aside funds in a reserve account. RHS requires borrowers to
place 1 percent of the original cost of the properties into the reserve
account each year for the first 10 years until 10 percent is held in
reserve. The borrower must continue to make contributions to the reserve
account to maintain it as withdrawals are made against the account to fund
rehabilitation work. RHS is concerned about the adequacy of funding reserves
at only 1 percent per year for 10 years and how to determine exactly what
must be done on an ongoing basis to preserve each property. While owners are
required to set aside a portion of their rent revenue in a reserve account
to provide for modernization needs, these reserve

Page 6 GAO- 02- 397 Multifamily Rural Housing

accounts have often not been large enough to adequately provide for major
rehabilitation.

Concerns about the loss of affordable units led Congress to enact
legislation designed to keep section 515 properties in the portfolio and to
protect low- income tenants from being displaced. Figure 2 details the key
legislation.

Figure 2: Key Prepayment Program Legislation

Source: GAO Analysis

Page 7 GAO- 02- 397 Multifamily Rural Housing

The legislation restricting prepayment of section 515 loans has resulted in
litigation. 3 Owners of section 515 properties who wished to prepay the loan
pursuant to their original loan agreements and remove their properties from
the section 515 program have sued the federal government. The owners claim
that the federal government, with the enactment of the legislation and the
subsequent refusal by RHS to accept unfettered prepayment, committed a
breach of contract and an unconstitutional taking of their properties. The
federal government maintains that no such breach occurred.

To date, prepayment activity has been minimal. Over 4,550 new properties
entered the portfolio since the 1988 prepayment restrictions went into
effect. This number far exceeded the number of properties that left the
portfolio after prepayment. For example, RHS data for fiscal years 1998
through 2001 show that fewer than 100 properties, on average have left the
portfolio each year. Fiscal year 2001 is the only year when the number of
prepayments exceeded the number of properties added to the portfolio.
However, this exception reflects a decline in funding rather than an
increase in prepayments. RHS officials noted that prepayment requests were
particularly limited in 1995 after an RHS administrative notice, citing an
application processing backlog and limited funding, resulted in discouraging
owners from applying for prepayment.

Since 1988, the impact of prepayment has been minimized by a statutory
restriction on owners who prepay by stipulating that, under certain
circumstances, the rents for tenants not be increased for as long as they
remain in the units. During fiscal years 1999 through 2001, the owners of
283 properties prepaid their loans. Following prepayment, 86, or about 30
percent, of these properties left the program without restrictions because
RHS determined that these properties were not needed in the market area and
their departure would not adversely affect housing opportunities for
minority households. The loans for 197, or about 70 percent, of the
properties were prepaid with restrictions on the rents of RHS- assisted
households that would remain in effect as long as these households continued
to reside in the properties. The owners of 88 other properties applied for
prepayment but decided, instead, to accept RHS incentives to

3 As of March 1, 2002, over 30 section 515 property owners were plaintiffs
in lawsuits involving RHS prepayment issues. Prepayment Activity

Has Not Adversely Affected the Section 515 Portfolio

Page 8 GAO- 02- 397 Multifamily Rural Housing

stay in the program for 20 more years. Table 1 shows the prepayments by
fiscal year.

Table 1: Recent Section 515 Program Prepayment Activity Owners prepaid
Fiscal year

Owners accepted incentives in lieu

of prepayment Without

restrictions With

restrictions Total prepaid

1999 43 34 43 77 2000 21 21 90 111 2001 24 31 64 95

Total 88 86 197 283

Source: RHS.

If the statutory requirement covering loans made before December 15, 1989,
were changed to allow prepayment without restriction after 20 years from the
date of the loan, we estimate that prepayment could be an option for the
owners of 3,872, or about 24 percent, of the 16,366 section 515 properties.
This estimate is based on our analysis of three factors that we could
measure and that RHS and industry representatives agree would limit the
potential for prepayment and conversion to market- rate rents. However, a
number of economic constraints on individual properties, which we could not
readily measure, would be likely to limit the number of actual prepayments
even further. Nevertheless, despite these potential constraints, RHS
officials are concerned that owners who are dissatisfied with RHS?s
procedures and statutory requirements could apply to leave the program if
the opportunity arose even if prepayment were not economically advantageous.

As shown in Figure 3, as of January 1, 2002, there were 3,772 section 515
properties that had served low- income households for 20 years or were
financed before 1979 and were never subject to a 20- year low- income use
restriction. In our analysis, we found that owners of 946 of these
properties could consider applying for prepayment. The loans on another
6,457 properties were eligible for prepayment; however, the properties were
still subject to a 20- year use restriction expiring between January 1,
2002, and December 15, 2009. We also found that over the next 8 years owners
of 2,926 of these properties would be able to consider prepayment after they
meet the 20- year restriction. The loans made on 6,137 properties on or
after December 15, 1989, were not eligible for prepayment because the
statute in effect when the loans were made precluded prepayment. Prepayment
Potential

Limited by Series of Factors

Page 9 GAO- 02- 397 Multifamily Rural Housing

Figure 3: Prepayment Potential: Section 515 Properties by Restrictive Use
Category As of January 2002

Note: We isolated 16, 507 properties from RHS?s databases but dropped 141
from our analysis because of inaccurate county code information, leaving a
universe of 16,366 properties.

Source: GAO analysis of RHS data.

Our estimate of the number of properties whose owners could consider
prepaying is based on three factors that RHS and industry representatives
believe limit the potential for prepaying. These factors are as follows:

 Ownership by a nonprofit organization or public entity. Prepaying
mortgages in an attempt to gain financially through converting to marketrate
rents could conflict with these organizations? basic mission of providing
high- quality, affordable housing for low- income families.  Heavy
dependence on RHS rental assistance that would cease upon

prepayment. Industry experts and RHS officials in headquarters and the
states we visited emphasized that, except in areas where growth has brought
unexpected prosperity, high dependence on RHS rental assistance is a strong
indicator that a property would have a difficult time maintaining adequate
cash flow without such assistance.

Page 10 GAO- 02- 397 Multifamily Rural Housing

 Location in a county where the population declined in the 1990s. Such
properties most likely would not be able to obtain significantly higher
rents in the private market than they are receiving under federal subsidies
because the relative lack of population growth reduces demand for housing
and keeps rents from rising.

After adjusting for these factors, we determined that the owners of 3,872
properties, or 24 percent of the total properties, could consider prepaying
their loans. The number of loans that actually would be prepaid depends on
several property- specific factors that we could not readily measure.
Factors affecting prepayment potential include whether individual property
owners (1) could operate without the subsidized direct loans, (2) had
property located in areas where high rental demand has raised market rents
above RHS rents, (3) had the funds or financing to meet future capital
needs, and (4) could meet any tax requirements they would incur.

For example, in 1986, tax laws were changed to eliminate accelerated
depreciation. 4 Owners who entered the program before the 1986 tax law
change enjoyed the benefits of accelerated depreciation by annually writing
off a larger portion of the original value of the property on their tax
return than was permissible after the tax law change. In some cases, owners
have fully depreciated their property, leaving them a zero cost basis,
instead of the original value of the property, when determining their
capital gains liability. While these owners enjoyed the write- off benefits
associated with the tax savings, their current tax burden can significantly
reduce the remaining proceeds. As a result, some owners are staying in the
program to avoid the tax consequences.

On the other hand, RHS officials are concerned that owners who are
dissatisfied with RHS?s procedures and statutory requirements could apply to
leave the program if prepayment were allowed, even if the costs exceeded the
expected financial benefits. For example, the acting assistant deputy
administrator for multifamily housing said he interprets the ongoing
lawsuits and discussions he has had with owners who believe they were
mistreated by the government as a strong indicator that psychological
factors might override economic considerations if the law were changed
covering loans made prior to December 15, 1989. Also, some owners want to
get out of the program because of dissatisfaction with

4 Accelerated depreciation encourages investment by letting entities recover
the cost of assets more quickly with relatively greater depreciation
deductions early in an asset?s life.

Page 11 GAO- 02- 397 Multifamily Rural Housing

RHS?s oversight or because they had planned to use the proceeds from the
sale of their properties to fund their retirements. RHS officials were
unable to quantify the extent to which these views prevail or could affect
the portfolio. RHS officials, however, believe that planned enhancements to
its management systems, scheduled to be completed during the summer of 2002,
will allow them to better identify property owners and determine the number
of properties in the portfolio that are at risk. It should also help them
better monitor replacement reserves and other property specific financial
matters, which, in turn, could allow them to better predict prepayment
potential.

Our estimate would also change if HUD tenant- based vouchers were made
available or RHS were able to offer tenant- based vouchers. Owners with
tenant- based vouchers could then prepay and exit the program but continue
to receive federal subsidies for the units where RHS tenants chose to
remain.

In the program?s early years, it was expected that the original loans would
be refinanced before major rehabilitation was needed. However, with
prepayment and funding restricted, this original expectation has not been
realized, and RHS does not know the full cost of the long- term
rehabilitation needs of the properties in its portfolio. RHS field staffs
perform annual and triennial property inspections. However, the inspections
identify current deficiencies rather than the long- term rehabilitation
needs of the individual properties, and RHS does not know the extent to
which reserve accounts will be able to cover long- term rehabilitation
needs. Without a mechanism to prioritize the portfolio?s rehabilitation
needs, including a process for ensuring the adequacy of individual property
reserve accounts, RHS cannot be sure it is spending limited rehabilitation
funds as effectively as possible and cannot tell Congress how much funding
it will need to deal with the portfolio?s longterm rehabilitation needs.

RHS state personnel inspect the exterior condition of each section 515
property annually and conduct more detailed inspections of each property
every 3 years. However, according to RHS inspection guidelines, the
inspections are intended to identify current deficiencies, such as cracks in
exterior walls or plumbing problems. Our review of selected inspection
documents in state offices we visited confirmed that the inspections are
limited to current deficiencies and RHS headquarters and state officials
confirmed that the inspection process is not designed to determine and
quantify the long- term rehabilitation needs of the individual properties.
Cost of Long- Term

Rehabilitation Needs of Section 515 Properties Unknown

Page 12 GAO- 02- 397 Multifamily Rural Housing

RHS has not determined to what extent properties? reserve accounts will be
adequate to meet long- term needs. According to RHS representatives,
privately owned multifamily rental properties often turn over after just 7
to 12 years, and such a change in ownership usually results in
rehabilitation by the new owner. However, with limited turnover and limited
funding, RHS properties primarily rely on reserve accounts for their capital
and rehabilitation needs, and RHS officials are concerned that the section
515 reserve accounts often are not adequate to fund the rehabilitation of
the properties.

Without comprehensive information on the physical condition of all the
properties in the portfolio, including the adequacy of the reserve accounts,
RHS has only been able to provide a wide range of estimates on the amount of
funding needed. An August 2000 RHS internal study estimates that without
increased funding or policy changes, in 5 years, 25 percent of the section
515 properties will no longer be safe and sanitary. Further, a 1999 internal
study estimated that it would take between $800 million and $3.2 billion to
meet the properties? long- term rehabilitation needs.

A background paper by the Millennial Housing Commission on preserving
affordable housing notes that a reserve account system, such as the one
designed by RHS, would be adequate in the private market where greater
turnover with higher cash flow is the norm. 5 However, the paper continues
that such a system is not reasonable in the public housing market that, by
design, does not have the equivalent ability to refinance and generate cash
flow. In this regard, the paper noted that reserve systems like RHS?s, are
generally adequate to cover only between one- third and one- half of
longterm capital needs.

RHS and industry representatives agree that the overriding issue for section
515 properties is how to deal with the long- term needs of an aging
portfolio. Since 1999, RHS has allocated about $55 million in rehabilitation
funds annually, but owners? requests for funds to meet safety and sanitary
standards alone have totaled $130 million or more for each of the past few
years.

5 See ?Background Paper: Preservation of Existing Affordable Housing,?
prepared for the Millennial Housing Commission Preservation Task Force,
draft, revised September 2, 2001. Established as part of Public Law 106- 74,
the bipartisan Millennial Housing Commission?s mission is to develop
proposals to improve housing opportunities.

Page 13 GAO- 02- 397 Multifamily Rural Housing

Over the past several years, RHS headquarters has encouraged its state
offices to allow individual property owners to undertake capital needs
assessments and has amended loan agreements to increase their rental
assistance payments as necessary to cover the future capital and
rehabilitation needs identified in the assessments. However, with varying
emphasis by RHS state offices and limited funding for increased rental
assistance, the assessments have proceeded on an ad hoc basis. As a result,
RHS cannot be sure that it is spending these funds as costeffectively as
possible.

The August 2000 RHS study highlighting the scope of the long- term
rehabilitation problem also recommended that the agency seek funding for a
physical- needs- assessment study of the existing portfolio, but no funding
was requested. USDA?s fiscal year 2003 budget proposal requests funds for
RHS to study its multifamily housing portfolio to determine how future
construction could be provided at less cost to taxpayers. The proposal does
not, however, request funds to obtain a comprehensive baseline of the
existing portfolio?s long- term capital needs.

With little new construction and limited prepayment, maintaining the
longterm quality of aging portfolio has become the overriding issue. While
RHS?s practice of allocating its limited funds to properties with documented
capital needs has helped properties on an ad hoc basis, RHS does not have a
process to determine and quantify the portfolio?s longterm rehabilitation
needs. As a result, RHS cannot ensure that it is spending its limited funds
as cost- effectively as possible and cannot provide Congress with a reliable
or well supported estimate of the funding needed to deal with the
portfolio?s long- term rehabilitation needs.

To better ensure that limited funds are being spent as cost- effectively as
possible, we recommend that the Secretary of Agriculture direct the RHS
Administrator to undertake a comprehensive assessment of the section 515
portfolio?s long- term capital and rehabilitation needs. Further, the
results of the assessment should be used to set priorities for the
portfolio?s immediate rehabilitation needs and to develop an estimate for
Congress on the amount and types of funding needed to deal with the
portfolio?s long- term rehabilitation needs. Conclusion

Recommendation for Executive Action

Page 14 GAO- 02- 397 Multifamily Rural Housing

We provided USDA with a draft of this report for their review and comment.
RHS?s acting deputy administrator for multifamily housing said that our
report was thorough and balanced, and he supported the report?s
recommendation. He said that the agency is focusing on developing strategies
to address the long- term needs of the portfolio, including building a
national database. He said that, given the rapidly aging portfolio, the time
is ripe to conduct a comprehensive effort to establish credible cost
estimates for long- term capital needs.

The acting deputy administrator took issue with two points. First, he said
that our draft gave the impression that RHS does not know the rehabilitation
needs of the properties. He stated that RHS knows the physical condition of
each property in the portfolio from its annual field staff reviews, but
agrees that the data from the routine inspections are not compiled into a
national database that would define long- term portfolio needs. We agree and
have revised the report to clarify this point. Second, the acting deputy
administrator said that he agrees that heavy dependence on rental assistance
would limit prepayments from occurring. However, he said that the factor
would be less of a deterrent to prepayment if vouchers were made available
to prepaying properties. We added language in the report to clarify this
point.

Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days after the date of this letter. At
that time, we will send copies of the report to interested congressional
committees and members of Congress; the secretary of agriculture; the
director, Office of Management and Budget; and other interested parties. We
will also make copies available to others on request.

If you or your staff have any questions about this report, please contact me
at (202) 512- 7631. Key contributors to this report are Angela Davis, Bess
Eisenstadt, Andy Finkel, Curtis Groves, Rich LaMore, John McDonough, and Tom
Taydus.

Stanley J. Czerwinski Director, Physical Infrastructure

Issues Agency Comments

Appendix I: Scope and Methodology Page 15 GAO- 02- 397 Multifamily Rural
Housing

Our work was based on a review of published data; discussions with officials
from the Rural Housing Service (RHS), the Department of Housing and Urban
Development, the housing industry, and RHS property owners; and an in- depth
analysis of RHS?s prepayment and section 515 files. We also reviewed
background papers prepared by the Millennial Housing Commission and attended
a roundtable discussion on housing preservation issues sponsored by the
Housing Assistance Council. Furthermore, we judgmentally selected and
visited RHS offices in Massachusetts, New Hampshire, and Vermont, where we
identified factors that could influence prepayment decisions by property
owners.

As part of determining how many section 515 properties have been prepaid in
recent years and the impact of their prepayment on the section 515
portfolio, we identified key laws and regulations affecting the
implementation and operation of the prepayment program. Through discussions
with agency officials and reviews of independent publications and legal
documents, we identified key changes in the section 515 program, including
legislative changes affecting prepayment. Where data was available, we
determined the number of properties whose loans were prepaid. We also
collected detailed funding and unit production information to document
changes in the section 515 portfolio since the program began.

To estimate the impact of changing the legislation to allow prepayment
without restrictions after 20 years, we planned to survey property owners
about their prepayment intentions and obtain specific information from RHS
on each property in the section 515 portfolio. However, RHS officials
informed us that the information needed to survey the owners was not readily
available because RHS?s database did not identify specific owners. In
addition, many of the properties are owned by large partnerships whose
individual owners are not easily identifiable. While we interviewed a number
of section 515 property owners on prepayment issues, we were unable to
survey all property owners because the RHS database did not identify
specific owners. Therefore we do not know the extent that the views of the
owners we interviewed are representative of all section 515 owners.

RHS also informed us that specific information about individual properties
was not readily available because the agency?s accounting systems track
loans rather than properties and most properties had more than one loan.
However, RHS combined information from three separate accounting systems
that helped us determine the likelihood of prepayment for each property. We
were able to isolate 16,507 properties from RHS?s database Appendix I: Scope
and Methodology

Appendix I: Scope and Methodology Page 16 GAO- 02- 397 Multifamily Rural
Housing

by identifying loans with the same street addresses and county codes, but we
had to drop 141 properties from our analysis because of inaccurate county
code information.

We reviewed the case files for individual properties at the three RHS state
offices we visited. From these reviews and discussions about the properties
with the state RHS officials, we identified factors that could help
determine the likelihood of prepayment. We also compared information from
state office case files with information in RHS?s database.

To determine the capital and rehabilitation requirements of the section 515
properties, we evaluated RHS reviews that identified the conditions of the
properties and the estimated costs to meet the requirements. We obtained the
views of RHS and industry representatives concerning the extent of the
rehabilitation needs. We also documented RHS?s inspection processes for
identifying rehabilitation requirements at the properties.

(541001)

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