Evaluation of the 

Mark-to-Market Program

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U.S. Department of Housing and Urban Development 

Office of Policy Development and Research
Evaluation of the 

Mark­to­Market Program

Prepared for:

U.S. Department of Housing and Urban Development

Office of Policy Development and Research

Prepared by:

Richard Hilton

Charles Hanson

Joanne Anderson

Meryl Finkel

Ken Lam

Jill Khadduri

Michelle Wood

Econometrica, Inc. 

Bethesda, Maryland

Abt Associates, Inc. 

Cambridge, Massachusetts

August 2004

Contract Numer: C­CHI­00669
Evaluation of Mark-to-Market Program

Acknowledgments 

The authors of this report gratefully acknowledge the important contributions of many others 

in this study of the Mark-to-Market (M2M) program. The large data collection effort could 

not have been so successful without the assistance and cooperation of many people. First and 

foremost, we would like to thank Dr. Jennifer Stoloff, our Project Manager in the Office of 

Policy Development and Research (PD&R), for her guidance and support on all aspects of 

this project. 

We would also like to thank the staff of the Office of Multifamily Housing Assistance 

Restructuring (OMHAR) for the time and effort they put in to assist the research team. 

Particular thanks in this regard go to Mr. Charles “Hank” Williams, the current Director of

OMHAR. We would also like to thank Ms. Genevieve Tucker, Ms. Paige Warren, Ms. 

Barbara Chiapella and Ms. April Chang, all current or former OMHAR staff. All of them

spent considerable time fielding questions from the research team and obtaining requested 

data and information. 

In addition to OMHAR staff we would also like to thank Mr. Richard F. Samson and Mr. 

Charles S. Wilkins, Jr., the financial advisor contractors to OMHAR. They were able to 

explain many of the subtleties of the financial analyses performed by OMHAR. 

We would also like to express our appreciation for the assistance by the staff of many of 

OMHAR’s Participating Administrative Entities (PAEs). Without their help we could not 

have obtained the detailed understanding of M2M operations that was one of the study’s 

main objectives. 

Finally, a special thanks to our senior internal project reviewers, Dr. Fred Eggers of 

Econometrica, Dr. Jill Khadduri of Abt Associates (Jill was also the author of several 

sections of the report), and Dr. James Wallace. The quality of this report was immeasurably 

heightened by their comments and suggestions. 

 iii 
Evaluation of Mark-to-Market Program

Foreword 

The Mark-to-Market (M2M) program, authorized by the Multifamily Assisted Housing 

Reform and Affordability Act (MAHRA), was enacted on October 27, 1997 to reduce the 

subsidy costs in FHA-insured properties with project-based Section 8 that had above 

market rents, to preserve the affordable housing stock, and to introduce administrative 

efficiencies in the multifamily FHA insured Section 8 portfolio. The Office of

Multifamily Housing Assistance Restructuring (OMHAR) was created within HUD, to 

manage the M2M program. OMHAR will sunset on September 30, 2004, but HUD’s 

authority to enter into M2M agreements will continue through September 30, 2006. 

This study aimed to assess the effectiveness of the M2M program in achieving the 

objectives stipulated in the authorizing legislation. The study made estimates of the 

savings to HUD to be derived from all M2M restructurings completed as of July 31, 

2003. The savings amount is based on calculating the 20-year impact of M2M-based rent 

reductions along with the costs associated with reducing the FHA-insured mortgages, 

administrative costs, and possible costs of default for Watch List properties. The base 

case comparison assumes that, without the program, rents would remain at their (abovemarket) pre-restructuring levels for the 20-year period. 

Since operations began in early 1999, the efficiency of the processing time for the M2M 

program has improved greatly. The decline in processing time appears to be associated 

with a number of policy changes implemented by OMHAR, including an Owner 

Incentive Package, changes in the M2M underwriting standards, and the personnel and 

organizational changes at OMHAR. Much of this gain in efficiency may also reflect the 

fact that M2M is a complicated program and it therefore takes time for all the relevant 

parties to learn and accumulate experiences. 

The clear intent of the legislation was that OMHAR should operate as a single function 

entity, with responsibility solely for implementing the MAHRA requirements. This 

administrative design appears to have been an effective means of achieving M2M 

programmatic goals. 

Dennis C. Shea 

Assistant Secretary for Policy 

Development and Research 

iv 
Evaluation of Mark-to-Market Program

Table of Contents 

Foreword........................................................................................................................... iv

Executive Summary......................................................................................................... vi

Introduction ................................................................................................................... vi

Overview of the M2M Program.................................................................................... vii

Objectives of This Study............................................................................................... viii

Overview of M2M Operations to Date .......................................................................... ix

Cost Savings Derived from M2M Restructurings.......................................................... xi

Processing Efficiency of the M2M Program................................................................. xii

Financial and Physical Viability of the M2M Properties............................................ xiii

Overview of OMHAR as the Implementation Arm of M2M..........................................xiv

Owner and Tenant Involvement in M2M ......................................................................xvi

General Conclusions and Lessons Learned.................................................................xvii

1. Introduction................................................................................................................... 1

Background..................................................................................................................... 1

The Programmatic Background to M2M........................................................................ 1

Policy Concerns.............................................................................................................. 2

Overview of Mark-to-Market (M2M) Program Administration ..................................... 2

Study Objectives.............................................................................................................. 4

Methodology and Data Overview................................................................................... 5

Organization of the Report ............................................................................................. 6

2. Process Analysis of the Mark-to-Market Program.................................................... 7

Introduction .................................................................................................................... 7

Background..................................................................................................................... 8

Demonstration Program................................................................................................. 9

The Multifamily Assisted Housing Reform and Affordability Act (MAHRA) ................. 9

Initial Organizing of OMHAR, 1998 ............................................................................ 11

The M2M Process......................................................................................................... 13

The First Phase of OMHAR Restructuring, 1999-2001 ............................................... 14

The Second Phase of OMHAR Restructuring, 2001-2003............................................ 17

OMHAR in 2003-2004.................................................................................................. 20

General Conclusions..................................................................................................... 21

3. Participation in the Mark-to-Market Program ....................................................... 24

Introduction .................................................................................................................. 24

Status of Participating FHA-Insured Properties in the M2M Process......................... 25

Participants in the M2M Program Compared with Non-Participants......................... 29

Closed Fulls Versus Closed Lites ................................................................................. 36

Closed Fulls – Market Rent and Exception Rent Properties........................................ 38

Closed Versus Watch List Properties ........................................................................... 41

Fulls Versus All Other Properties ................................................................................ 44

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Evaluation of Mark-to-Market Program

Table of Contents 

(Continued) 

4. Program Savings......................................................................................................... 48

Introduction .................................................................................................................. 48

Total Savings and Costs Resulting From the Mark-to-Market Program ..................... 49

Factors Affecting Savings for Lites............................................................................... 63

Factors Affecting Savings for Fulls.............................................................................. 66

5. Analysis of Program Efficiency ................................................................................. 70

Introduction .................................................................................................................. 70

Background................................................................................................................... 70

Methodology ................................................................................................................. 71

Total Completion Time ................................................................................................. 74

Processing Time by Major Milestone ........................................................................... 76

Processing Time by PAE Type...................................................................................... 80

Conclusion .................................................................................................................... 83

6. Analysis of Program Outcomes ................................................................................. 84

Introduction .................................................................................................................. 84

Analysis of the M2M Underwriting Standards............................................................. 85

Analysis of the Required Rehab Escrows and Initial Deposit to Replacement Reserves

.................................................................................................................................. 91

Comparisons of Pre- and Post-Restructuring Property Performance ......................... 94

Conclusion .................................................................................................................... 99

7. The Prospective Study .............................................................................................. 101

Introduction ................................................................................................................ 101

Sampling Methodology ............................................................................................... 102

Characteristics of the Sample ..................................................................................... 104

The M2M Process for the Prospective Study Sample ................................................. 105

Salient Characteristics of the M2M Process for the Prospective Study Sample ........ 106

Complicating Factors................................................................................................. 108

The PAE’s Perspective on the M2M Process ............................................................. 112

The Owners’ Experience in the M2M Process ........................................................... 114

The Tenants’ Experience in the M2M Process........................................................... 115

Other Lessons Learned ............................................................................................... 116

Appendix A.................................................................................................................... 119

Comparison of Property Characteristics by Program Participation Status .............. 119

Appendix B .................................................................................................................... 142

Comparison of Property Characteristics Based on Total Savings............................. 142

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Evaluation of Mark-to-Market Program

Table of Contents 

(Continued)

Appendix C: Case Studies............................................................................................ 152

Introduction ................................................................................................................ 152

Case Study One: College Park Apartments Lancaster, California—Lite Restructuring

................................................................................................................................ 154

Case Study Two: Eastward Court Apartments Casper, Wyoming—Full Restructuring

................................................................................................................................ 159

Case Study Three: Fair Park Apartments Sardinia, Ohio—Full Restructuring......... 167

Case Study Four: Genesse Towers Utica, New York—Full Restructuring ................ 174

Case Study Five: Kingsley Park Essex, Maryland—Full Restructuring .................... 184

Case Study Six: Lynne Acres Shelbyville, Kentucky—Full Restructuring.................. 196

Case Study Seven: Murphy Blair Rehab II St. Louis, Missouri—Full Restructuring. 205

Case Study Eight: Myrtle Manor Phoenix, Arizona—Full Restructuring.................. 211

Case Study Nine: Russell Erskine Apartments Huntsville, Alabama—Full 

Restructuring.......................................................................................................... 218

Case Study Ten: Six Chimneys Apartments Cleveland, Ohio—Full Restructuring.... 223

Case Study Eleven: Sneedville Garden Apartments Sneedville, Tennessee—Full 

Restructuring.......................................................................................................... 230

Case Study Twelve: Winthrop Apartments Tacoma, Washington—Full Restructuring

................................................................................................................................ 235

Case Study Thirteen: Valley Heights Apartments Quincy, California—Full 

Restructuring.......................................................................................................... 243

Case Study Fourteen: Villa 14 Apartments Ault, Colorado—Full Restructuring ...... 250

Case Study Fifteen: Village Green Apartments Red Bay, Alabama—Full Restructuring

................................................................................................................................ 256

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Evaluation of Mark-to-Market Program

Executive Summary 

Introduction 

This evaluation of the Mark-to-Market (M2M) Program was conducted under a contract 

issued by the U.S. Department of Housing and Urban Development’s (HUD) Office of 

Policy Development and Research (PD&R) to Econometrica, Inc. and its subcontractor Abt 

Associates in September 2002. The M2M program was authorized by Congress to address 

concern about the rising costs of rent subsidies in HUD’s Section 8 multifamily housing 

program. The goal of the study is to evaluate the overall implementation of the program. This 

includes both the cost-effectiveness of the program and its success in addressing the needs of 

key stakeholders, the owners and residents of Section 8 properties. 

The Section 8 program pays rental subsidies to owners of multifamily properties that provide 

rental units to low-income households. The level of rent subsidy for each property was based 

on initial rents that were established when the properties entered the program in the late 

1970s through the mid 1980s. Often rents were set above local market levels to compensate 

for the costs of Section 8 administration, the higher construction costs occasioned by using 

Davis-Bacon wage rates, and special features for the elderly. It should also be kept in mind 

that new construction is expensive by definition and in this period costs were driven up by 

high inflation. For example, in 1981 the FHA single-family interest rate peaked at 17.5%. 

Rent allowances supported the goal of developing new affordable rental housing in better 

areas than in the past. However, by the late 1990s many of these Section 8 properties 

received rental subsidies that were substantially above market levels. HUD analysis in the 

early 1990s indicated that the continued growth in the level of subsidies would eventually be 

unsupportable within HUD’s budget limitations. 

To contain the rising costs of rental subsidies, while preserving the viability of the properties, 

the M2M program authorizes HUD to reduce rents to market levels on Section 8 properties 

financed with HUD (FHA) insured mortgages. The primary mechanisms for maintaining the 

financial viability of the properties is to write-down and/or reduce the FHA mortgage to a 

level that can be supported by the lower rents. These rental adjustments and mortgage 

restructurings would be negotiated as existing Section 8 contracts expired in the late 1990s 

and early 2000s. A primary programmatic goal was the preservation of affordable housing. 

Preservation encompassed the continuing physical and financial viability of a property while 

being able to charge affordable rents. 

The Executive Summary begins with an overview of the M2M program and the structure and 

objectives of the evaluation. The Executive Summary next reports the more quantitative 

evaluation findings in four sections that discuss: 

• The level of M2M activity and the characteristics of the properties that participated or 

chose not to participate. 

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Evaluation of Mark-to-Market Program

• Estimates of the quantifiable costs and benefits of the program. 

• Improvements over the life of the program in the efficiency with which it moves 

projects through the restructuring process. 

• Preliminary data on the post-M2M financial performance and physical condition of 

projects that have been restructured. 

The Executive Summary then presents our assessment of OMHAR as an organizational 

strategy and the effects of the M2M process on owners and tenants. The Executive Summary 

closes with a discussion of lessons for future M2M-type efforts to manage HUD’s portfolio 

of assisted multifamily properties. 

Overview of the M2M Program 

The M2M program was authorized by the Multifamily Assisted Housing Reform and 

Affordability Act (MAHRA) enacted on October 27, 1997. A key provision of MAHRA 

required an independent office, created within HUD, to manage the M2M program. This was 

the Office of Multifamily Housing Assistance Restructuring (OMHAR). It was expected that 

projects would enter the program when their original Section 8 contracts expired in the late 

1990s and early 2000s. Therefore, the legislation, as amended, stipulated that OMHAR 

would sunset on September 30, 2004. HUD’s authority to enter into M2M agreements would 

continue through September 30, 2006, to allow for completion of processing on the last 

projects. 

The first goal of the M2M program is to reduce project-based Section 8 subsidized rents that 

are greater than market level in projects with FHA-insured mortgages. The program

authorizes HUD to reduce Section 8 rents to market rent levels in these projects. In some

cases the project will remain viable with the reduced rents, without further action by 

OMHAR. These are called “Lite” transactions or “rent restructurings.” The processing 

required for these transactions is limited and no long-term use agreement is obtained from the 

owner. 

In many cases, however, a simple rent reduction would result in a default because a project 

would no longer be able to pay its expenses and debt with the reduced income. Therefore, 

M2M authorizes partial or full payments of mortgages from the FHA Insurance Fund to 

reduce the size of the first mortgage debt. By reducing the monthly mortgage payment to the 

point where market rents can adequately cover it (and appropriate project expenses), the 

Section 8 subsidy is reduced and the project remains viable. These transactions are called 

“Fulls” or “mortgage restructurings.” The processing required for these transactions is quite 

substantial, and a 30-year Use Agreement, requiring that the property continue to provide 

affordable housing, is obtained from the owner. 

In a Full transaction, the existing FHA-insured first mortgage is paid off in its entirety and a 

new, generally much smaller mortgage, is put in its place. In most, but not all, cases the new 

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Evaluation of Mark-to-Market Program

mortgage is also FHA-insured. In many cases, the amount of the claim (mortgage) payment 

is not forgiven; rather the project carries this amount as additional debt in second and third 

mortgages that are payable only to the extent funds are available over time or at the time the 

project is sold or refinanced. 

The second goal of the M2M program is the preservation of affordable rental housing where 

it is needed. Aspects of the program targeted to this goal include: 

• Provision for current project repairs where needed, through a rehabilitation escrow 

that provides for repairs to be completed after closing. Those repairs may include 

items necessary to bring the property up to a reasonable non-luxury standard, such as 

the installation of air conditioning in areas where all the comparable properties are 

air-conditioned. 

• Requiring ongoing deposits to reserves for replacement that are designed to assure 

that the property remains sound during the entire term of the new mortgage. These are 

nearly always much greater than the reserves that were required under existing HUD 

mortgages. 

• Authority to grant above-market rents in jurisdictions where there is a need for 

affordable housing and the property cannot be made financially viable with market 

rents. The above market rents must be sufficient to pay for projected operating costs 

and any new debt service on the property. These are called “exception rents.” By 

statute, no more than 5 percent of the properties in the program may have exception 

rents. 

Objectives of This Study

This study aims to assess the effectiveness of the M2M program in achieving the objectives 

stipulated in the authorizing legislation. Among the specific objectives of the study are: 

• Determining if the M2M program has effectively addressed the problem of growing 

Section 8 project-based rental subsidies in properties with FHA-insured mortgages. 

• Establishing if the M2M restructuring process has promoted the preservation of 

affordable housing units. 

• Assessing the extent to which M2M has promoted capital improvements in Section 8 

properties and enhanced the quality of housing provided to Section 8 tenants. 

• Assessing the effectiveness of the administrative mechanisms HUD has employed to 

implement M2M, which include underwriting M2M transactions by Participating 

Administrative Entities (PAEs) under contract to OMHAR. 

To address these objectives the study used three distinct data collection approaches: 

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Evaluation of Mark-to-Market Program

• A Process Analysis of the administrative mechanisms put in place to implement the 

M2M program. This study component involved a review of all pertinent OMHAR 

documentation, as well as interviews with key players in the restructuring process. 

The key players included past and current OMHAR staff, HUD Office of Housing 

Staff, senior managers at PAEs, and owners of Section 8 multifamily properties. This 

study component addressed research questions on participant satisfaction, tenant 

impacts, effects of program changes over time, and PAE operations. 

• A Retrospective Statistical Analysis of trends in participation levels, estimates of 

savings to the government resulting from the program, measures of program

efficiency, and preliminary indications of program outcomes. This part of the 

evaluation used OMHAR and FHA data on properties to provide quantitative 

assessments of each of the study’s research questions. The sample was limited to 

projects that entered the program by July 31, 2003. 

• A Prospective Analysis that used a case study approach to document the 

restructuring process for 15 properties undergoing restructuring in 2003. This was the 

primary data source on the impact of M2M on tenants. This study component also 

analyzed the interplay of interests and incentives that shape the outcomes of the 

restructuring process. Case studies on each of these 15 properties appear in the second 

section of this report. The sample was limited to projects that entered the program by 

July 31, 2003. 

The conclusions drawn from the data obtained from the three data collection approaches are 

presented below. 

Overview of M2M Operations to Date 

As of July 31, 2003 a total of 2,416 properties had entered the M2M process (27 percent of 

all FHA-insured Section 8 properties). We expect that somewhere between 1,000 and 2,000 

additional properties will enter the M2M process. (An earlier study by Abt Associates 

estimated that approximately half the assisted stock, or about 4,500 properties had rents 

above local market levels. We know that approximately 2,400 properties have already 

entered the process, so we can assume that less than 2,000 additional properties with above 

market rents will enter the M2M process as their contracts expire. It is likely that the number 

of properties with above market rents that will enter the process will be smaller than 2,000 as 

some will opt out or not enter the restructuring process for other reasons. The remaining 

properties will have below-market rents). 

Some of the characteristics of the properties that have gone through the program as of July 

31, 2003, include: 

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Evaluation of Mark-to-Market Program

• Of the 2,416 properties that entered the program, 1,187 (49 percent) had closed. This 

included 391 Lites and 796 Fulls. Over 95 percent of the 608 properties in the 

pipeline at the end of July 2003 were Fulls. 

• A total of 621 had “Actions Other Than Closing” (AOTC). This includes 297 

properties that were placed on OMHAR’s “Watch List.” Watch List properties have 

their rents reduced to market levels, but do not have their mortgages restructured. In 

contrast to Lites, which the PAE believes are financially sound with reduced rent but 

no mortgage reduction, the PAE believes that Watch List properties may experience 

financial difficulties at these reduced rent levels. Watch List properties may reenter 

the restructuring process at a later time. 

AOTCs also include 324 properties that had discontinued the restructuring process 

without being placed on the Watch List because they were found to be ineligible or 

for other reasons. The most common reason for a property being ineligible is that it 

was financed by state or local bonds that prohibit a M2M restructuring. Properties 

that are ineligible due to this reason may enter the M2M process at a time when the 

bond financing permits it. Properties may discontinue the process because an owner 

with an out-year contract expiration date elects not to move forward with the 

restructuring and is not required to have the rents reduced to market at the time the 

deal is discontinued. 

• Properties that entered M2M tended to have high pre-restructuring rents. In addition, 

M2M properties were slightly more likely to be located in the South and in nonmetropolitan areas than the properties in the portfolio as a whole. 

• The Western region was significantly under-represented among properties entering 

M2M. 

• Properties assisted under the Section 8 New Construction/Substantial Rehabilitation 

(NC/SR) Programs often started out with above-market rents in order to support 

housing development in targeted areas. Many of these properties also benefited from

automatic annual increases in rents. As a result, many of these properties had high 

rents and were therefore more likely to enter the M2M program. In contrast, rents in 

the older group of Section 8 properties were often set below market levels and rent 

increases were granted based on actual budget needs. 

• In many respects, Full properties are the best measure of M2M’s impact. These are 

the properties that could most probably remain financially and physically viable with 

reduced rents through a debt restructuring, and thus they represent the stock of 

properties that was preserved as a result of the program. Salient characteristics of 

Fulls include: 

• Fulls are more likely to be in the South and less likely to be in the West than 

Lites. 

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Evaluation of Mark-to-Market Program

• Fulls are more likely to be in non-metropolitan areas, and less likely to be in 

central cities than Lites. 

• Fulls are more likely to be serving family households than Lites. 

• Compared to all other properties eligible for M2M, Fulls were more likely to 

be in Census tracts with higher poverty rates. 

• Compared to Lites, Fulls tended to be in Census Tracts with comparatively 

higher vacancy rates and higher rates of poverty. 

• Of the closed Fulls, 28 percent had received exception rents. 

• Exception rent properties were more likely to be in poorer neighborhoods than 

properties that closed at market rents. 

• Exception rent properties were more likely to be in non-metro areas compared 

to properties that closed at market rents. 

Cost Savings Derived from M2M Restructurings 

The study made estimates of the savings to HUD to be derived from all M2M restructurings 

completed as of July 31, 2003. The savings amount is based on calculating the 20-year 

impact of M2M-based rent reductions along with the costs associated with reducing the 

FHA-insured mortgages, administrative costs, and possible costs of default for Watch List 

properties. The base case comparison assumes that, without the program, rents would remain 

at their (above-market) pre-restructuring levels for the 20-year period. For the properties that 

had been processed through M2M as of July 2003, the average rent savings were: 

• For Lites, $73 per-unit, per month, for a total of $418.7 million net present value over 

20 years. 

• For all Fulls, $98 per-unit, per month, ($106 for Fulls that closed at market rent and 

$79 for Fulls that closed with exception rents). The total net present value of expected 

Section 8 savings is $1.1 billion over 20 years across all Fulls. 

• For Watch List Properties, $92 per month, per unit, or $273.7 million net present 

value over 20 years. 

• These rent savings total $1.79 billion net present value over 20 years. 

These projected savings have to be measured against the costs of writing down mortgages for 

the Fulls, possible future defaults of Watch List properties, and the costs of operating the 

M2M program. 

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Evaluation of Mark-to-Market Program

Three net savings estimates were developed based on differing scenarios regarding the future 

financial performance of Fulls and Watch List properties that have gone through M2M. The 

upper-end scenario assumes that no Watch List properties will default and there will be full 

repayment of second and third mortgages for all Fulls. Under this scenario the present value 

of total expected net savings over the next 20 years for all properties that have been 

processed through M2M as of July 2003 would be $883 million, or $30 per-unit per-month. 

A lower-end scenario assumes that all Watch List properties will default and that there will 

be no repayment of second and third mortgages for all Fulls. Under this scenario the present 

value of total expected net savings over the next 20 years for all properties that have been 

processed through M2M as of July 2003 would be $111 million, or $4 per-unit per-month. 

A third, more realistic scenario assumes partial repayment of the seconds and thirds and no 

defaults of Watch List properties. Under this scenario the present value of total expected net 

savings over the next 20 years for all properties that have been processed through M2M as of 

July 2003 would be $831 million, or $28 per-unit per-month. 

Processing Efficiency of the M2M Program 

Since operations began in early 1999, the efficiency of the processing time for the M2M 

program has improved greatly. The decline in processing time appears to be associated with a 

number of policy changes implemented by OMHAR, including an Owner Incentive Package, 

changes in the M2M underwriting standards, and the personnel and organizational changes at 

OMHAR. Much of this gain in efficiency may also reflect the fact that M2M is a complicated 

program and it therefore takes time for all the relevant parties to learn and accumulate 

experiences. 

Focusing on the M2M properties that were completed as of July 31, 2003, our analysis 

compared processing times of these transactions by the type of restructuring outcomes, by 

type of PAEs, by major processing milestones, and by timing of the restructuring in relation 

to OMHAR’s underwriting and processing regimes. 

The major findings are: 

• In general, Full restructurings take more time to process than Lite restructurings. 

Completion time has been shortened substantially for both types of transactions. 

• Lites that entered the program during the fourth quarter of 1999 had a median 

completion time of 245 days, while transactions that entered the pipeline since the 

first quarter of 2001 had a median completion time between 110 and 176 days. The 

median completion time was 171 days across all cohorts. 

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Evaluation of Mark-to-Market Program

• For Fulls that closed at market rent, the median completion time was 399 days. The 

duration has been reduced from 550+ days for the earlier cohorts to generally within 

400 days for Fulls that entered the program since the later part of 2000. 

• As expected, Fulls closed at exception rent levels tend to require the longest 

processing time, because they generally have more issues to resolve. While the 

median processing time is 456 days across all cohorts for this transaction type, those 

that entered the pipeline since the first quarter of 2002 have a median completion time 

of less than 400 days. 

• Regardless of restructuring type, the majority of the processing time is spent between 

the PAE’s acceptance of the asset assignment and the submission of the restructure 

plan. This portion of the processing time has declined markedly over time. In 

contrast, there are no discernible trends for the duration between plan submission and 

final closing. 

• Both public and private PAEs have become more efficient over time. Regardless of 

restructuring types, private PAEs tend to require a slightly shorter time to complete a 

restructuring. 

Financial and Physical Viability of the M2M Properties 

M2M addresses fully the issue of funding ongoing rehabilitation and capital replacement 

needs. This is unlike conventional market multifamily financing, which expects a resale and 

recapitalization every few years. It also is unlike other FHA programs, which typically have 

provided per-unit-per-year contributions to replacement reserves appropriate to early years of 

a new property, but not large enough for the 40-year mortgage term. Under M2M, as part of 

the underwriting for Full restructuring transactions, the property’s annual reserve for 

replacement is calculated to ensure that ongoing repairs for the new mortgage term plus two 

years can be funded. In addition, the initial deposit to the replacement reserve is fully 

financed as part of the new mortgage. Immediate needs (first year) are also included in the 

transaction through a rehab escrow account. Eighty percent of these rehab needs are funded 

through the program, with the owner required to provide the other 20 percent. In cases where 

critical repairs (repair needs threatening health and safety) are identified in the Physical 

Condition Assessment (PCA) document during the restructuring process, property owners are 

required to fix those problems before closing. After closing, owners are expected to draw 

funds from the rehab escrow and complete other M2M-required repairs during the 

subsequent 12-month period. 

For the Full restructurings closed through early August 2003, the average rehab escrow was 

$2,244 per unit (with a median of $1,103). Consistent with their worse physical condition, 

escrows for properties that closed with exception rents were higher than for properties that 

closed at market rent—an average of $2,729 per unit compared with $2,044 per unit (the 

median escrow amount for exception rent deals was $2,045 per unit compared with $950 per 

unit for market rent transactions). The average initial deposit to the replacement reserve is 

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Evaluation of Mark-to-Market Program

$2,752 per unit (with a median of $2,206). The initial deposits are higher for exception rent 

transactions, averaging $3,367 per unit with a median of $3,000. The average is $2,512 for 

market rent transactions, with a median of $1,974. 

Funds for rehab escrow and initial deposit to replacement reserves totaled over $114 million 

and $164 million so far. While the provision of these funds should have a large impact on the 

future viability of the restructured properties, the rehab escrow funds also represent an 

immediate and tangible benefit for tenants living in these HUD-assisted properties. As a 

result of M2M, these tenants are able to live in higher physical quality, better maintained 

units. 

The M2M program has employed a set of underwriting standards that are specifically tailored 

for these properties. The standards, in theory, will foster long-term financial and physical 

viability. This is especially the case for the cohorts of transactions that were completed under 

the revised underwriting standards introduced by OMHAR in early 2002. However, at the 

time of this evaluation, not enough time had elapsed to allow us to examine these properties’ 

actual long-term performance. 

Our examination of the transactions that were completed in 2000 and 2001 reveals that Lite 

restructuring properties have the best financial performance in both the pre- and postrestructuring periods among all the outcome types. In comparison, a sizable portion of Fulls 

closed at exception rents and Watch List properties have values for many of the financial 

performance indicators in the post-restructuring period that are worrisome. Many of these 

projects have lower values on some financial performance indicators than they had in the prerestructuring period. For example, some properties have had negative surplus cash and have 

not had sufficient income to cover operating expenses and debt service. The reason for this 

under-performance is not immediately clear. Since we have only one or two years’ financial 

data for the post-restructuring period, the results may not be representative of long-term

performance. An encouraging sign is that, according to data collected by the Office of 

Housing, the number of defaults that occurred to this portfolio of properties so far has been 

very small. 

These properties deserve further investigation when financial statements from a longer period 

of operations are available. It will also be important to see if properties that were 

underwritten after the first couple of years of the program will perform better than earlier 

cohorts. It would be reasonable to expect some improvements because of greater experience 

in the program by all parties and because of improved guidance, training, and 

communications provided as a result of that experience. OMHAR made substantial efforts to 

assess performance in early operations and to provide timely feedback, procedural/policy 

changes, and re-training where warranted to improve performance. 

Overview of OMHAR as the Implementation Arm of M2M 

The M2M authorizing legislation stipulated that the OMHAR office should operate as an 

independent entity within HUD. The original legislation also stipulated that the Director of 

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Evaluation of Mark-to-Market Program

OMHAR would report directly to the Secretary of HUD. This was changed in the 

reauthorization legislation of 2001 to have the Director report to the Assistant Secretary for 

Housing/FHA Commissioner. Even after this change, OMHAR has retained its semiindependent status. As part of this status, OMHAR employees are compensated according to 

the Treasury Schedule, which sets compensation at 120 percent of the rate for a given Federal 

position. 

The clear intent of the legislation was that OMHAR should operate as a single function 

entity, with responsibility solely for implementing the MAHRA requirements. This 

administrative design appears to have been an effective means of achieving M2M 

programmatic goals. Observations that support this conclusion include: 

• OMHAR has been successful in developing a strategy to meet the seemingly 

contradictory legislative goals of achieving cost savings and preserving affordable 

housing. This success is indicated by the projected savings described above and by 

the willingness of OMHAR to restructure properties even if they result in a projected 

net loss to the government. As of July 2003, approximately 30 percent of OMHAR’s 

completed Fulls resulted in projected losses for HUD. 

 

• OMHAR exhibited the flexibility needed to redesign the program as it gained 

operational experience. Programmatic enhancements introduced by OMHAR in 2000 

and 2001 were remarkably effective in enabling the program to meet its objectives. 

The development of an Owner Incentive Package was particularly useful. Prior to that 

time there was a considerable reluctance on the part of owners to enter into 

negotiations for Fulls. By 2002-2003 this resistance had largely dissipated. In fact, by 

2003 some owners who had completed Lite transactions were coming back into the 

program as Fulls. 

• Given the complexity of developing financial restructurings for multifamily 

properties, by 2003 the restructuring processes were remarkably efficient. For most 

properties in the system, the discussions between OMHAR and owners were nonconfrontational. In part this was due to a cadre of experienced underwriters developed 

at the PAE level. In addition, by 2003 OMHAR had sufficient operational experience 

to have developed general guidelines for most situations. By 2003, many owners were 

also aware of many completed Fulls that resulted in financially sound restructuring 

agreements. 

• OMHAR, through its PAEs, has strongly promoted tenant involvement in the 

restructuring process. Tenant involvement was a major goal of the authorizing 

legislation, and OMHAR has ensured that these elements have been scrupulously 

observed. In some cases, PAEs schedule tenant meetings even in cases when not 

required to do so by regulation. 

• The M2M process, as administered by OMHAR, appears to provide substantial 

benefits to the Section 8 tenant population. The Section 8 tenants receive the benefit 

of having properties retained in the program, even at a projected loss for HUD. In 

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Evaluation of Mark-to-Market Program

addition, the 12-month rehabilitation packages included as part of Fulls often provide 

considerable immediate physical enhancements for tenants. 

Owner and Tenant Involvement in M2M 

There are a number of constituencies with major stakes in the M2M process. One is the 

group of Section 8 owners. Another is the tenant population. The experience of these 

constituencies in the M2M process as of 2003 may be summarized as follows: 

• By 2003 most M2M discussions were carried out by owners’ representatives and not 

by the owners themselves. To a large extent the discussions about restructuring 

agreements had become routinized. OMHAR has not experienced any major 

differences when dealing with representatives as opposed to the owners themselves. 

 

• Most owners had limited flexibility regarding whether to enter the program. Most 

properties that entered the program through 2003 retained their value only if the 

property remained in the Section 8 program. In general, even without the incentives 

offered by M2M, most owners would have had little choice but to keep their 

properties in the Section 8 multifamily program. 

• The most common contentious issue for owners was the type and extent of 

repair/rehabilitation to be included in the rehabilitation escrow. While there was 

normally little question that these items would improve the physical condition of the 

property, some owners were reluctant to agree to the items and costs of repairs 

because the owners are required to provide 20 percent of such costs. 

• The involvement of tenant support or advocacy groups has been almost non-existent. 

The authorizing legislation provided funds to non-profit tenant advocacy groups who 

would assist in protecting tenants’ interests. However, the involvement of such 

groups in the M2M process has been minimal. 

• Required tenant meetings appeared to be only moderately successful in informing 

tenants about the restructuring process. While the requirement for holding tenant 

meetings has been observed, attendance is often poor, and most tenants appear to 

have only a limited understanding of the restructuring process. 

• The substantive input of tenants into the prioritization of initial (12-month) rehab 

requirements for a property appears to be modest. The property enhancements 

mandated for the 12 months after the closing of a Full are an immediate and tangible 

benefit for tenants. However, tenants appear to have limited input in deciding 

priorities regarding physical enhancements. Tenants’ input in this area has been 

modest even though OMHAR and the PAEs consistently made significant efforts to 

solicit it. 

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Evaluation of Mark-to-Market Program

General Conclusions and Lessons Learned 

In addition to observations about current M2M operations, the project team also drew some

conclusions that would apply to continuing M2M operations or similar government 

initiatives. These lessons drawn from the M2M experience include: 

• It would be beneficial for M2M or a similar program to have the capability to look at 

a wider context than a single property. On the whole, the PAE underwriters have been 

extremely competent. However, their expertise is focused on financial issues. In 

certain cases, it would be useful for M2M to have the capability to look at a broader 

community context. This would enhance the opportunity to bring in additional 

community or economic development funds to a property, achieving greater value for 

the property and a higher level of services to tenants. 

 

• Private PAEs, on the whole, have proved more effective than Public PAEs in 

implementing the program. This has been largely because the private PAEs have been 

able to develop staff units devoted solely to M2M. (It should be noted that a number 

of public PAEs have operated effectively, usually by employing experienced 

underwriters on a fee basis.) The historic memory of the private PAE staffs will be a 

critical resource for HUD as it moves to complete the remaining restructurings by 

September 2006. 

• Exception rents have been necessary to complete a significant number of 

restructurings (to date over 25 percent). However, it would be beneficial if an analysis 

could be performed early in the restructuring process that looks at the need for the 

property within a broad community context. Current program requirements (and 

financial incentives) currently limit a PAE’s ability to perform this type of analysis. 

However, in some cases, considerable time and expense are devoted to a restructuring 

before this justification analysis is performed. An analysis of a community’s housing 

needs obtained earlier in the process might enable PAEs to identify marginal cases 

where the preservation of a property may not be needed in a given locality. 

• The MAHRA legislation did not provide M2M with an effective method for bringing 

“partners” into a restructuring, even when that would appear to be the optimal 

strategy to provide the greatest benefit to tenants. In several cases observed during 

this study, a major community redevelopment effort appeared to be the best strategy 

to meet the needs of both tenants and the local community. Identifying partners that 

could be brought in to assist in such a redevelopment was not an anticipated role for 

either the PAEs or OMHAR. While this is not a legitimate role for the PAEs within 

the current program structure, this type of role might be considered for future M2Mtype programs. 

• The M2M process is ill-suited to address cases in which key community stakeholders, 

including elected officials, oppose the preservation of an affordable multifamily 

property. At one property observed during the study, some local stakeholders 

vigorously opposed the preservation of a large multifamily property. In this case there 

xvii 
Evaluation of Mark-to-Market Program

were possibilities for a compromise solution, but it was not clear what entity should 

conduct such negotiations. Although OMHAR and PAE staff have regularly notified 

local officials about restructuring efforts and the times scheduled for public meetings, 

OMHAR’s existing mandate appears to be too narrow for it to assume responsibility 

for resolving conflicts on a regular basis. 

• Where a significant amount of non-housing services are provided at a property, there 

needs to be greater involvement of the non-housing service providers. One property 

in this study provides a 24-hour secure housing environment for a developmentally 

disabled population. The facility receives major funding from social service agencies. 

Consideration of non-housing services is outside normal FHA processing procedures. 

However, in any future M2M-type program, consideration should be given to a 

mechanism for including these partners in negotiations. 

• In assessing the justification for preservation, particularly in the cases of exception 

rents or a substantive net loss to the government, the process could include a more 

expansive analysis of housing alternatives. Many of the properties observed in this 

study were in small rural communities or small cities. Analysis of rental markets in 

such cases is normally restricted to the “built-up” areas in the vicinity. However, for a 

high proportion of the tenant population in such areas, the main alternatives to 

assisted housing are isolated rural properties, such as trailers. HUD should explore if 

there is a means of obtaining data on what are considered realistic housing 

alternatives for tenants at a specific property. 

• In any future MAHRA-type legislation there needs to be consideration of more 

effective mechanisms for establishing the suitability of restructuring seriously 

deteriorated properties. Some properties observed during the study showed 

indications of sub-standard maintenance. Once the M2M application had been made, 

the PAE had the responsibility of determining if a viable restructuring package could 

be developed. The incentive in such cases, at the PAE level, is to see if there is any 

way a restructuring plan can be made to work. In a future program, it might be 

preferable to ask the PAE to demonstrate, with a heavy preponderance of evidence, 

the need to move ahead on a restructuring. 

• In any future M2M-type program, consideration should be given to increasing the 

level of tenant input on security issues. This issue is often of paramount importance to 

tenants. In addition, lack of security can have a direct impact on financial 

performance, as it often drives up vacancy rates. As noted above, tenant input into the 

restructuring process has often been limited, despite OMHAR’s best efforts. One 

possibility would be an attempt to obtain tenant input on security issues in a survey 

conducted separately from the mandated tenant meetings. 

xviii 
Evaluation of Mark-to-Market Program

1. Introduction 

Background 

This report presents the findings from an evaluation of the Mark-to-Market (M2M) program, 

which Congress established to address the problem of rapidly increasing costs for the FHAinsured component of the subsidized Section 8 Project-Based Rental Assistance Program. 

The M2M program was authorized by the Multifamily Assisted Housing Reform and 

Affordability Act (MAHRA), enacted on October 27, 1997. 

In September 2002, HUD’s Office of Policy Development and Research (PD&R) issued a 

contract to Econometrica, Inc., and its subcontractor Abt Associates, Inc., to assess the 

progress of the M2M initiative. This report presents the findings of the Econometrica 

research team, derived from a variety of data collection and analysis activities undertaken 

from November 2002 through November 2003. 

The Programmatic Background to M2M 

Between the mid-1960s and mid-1980s, the Federal Government committed substantial 

resources for project-based rental assistance in new or substantially rehabilitated multifamily 

(5 units or more) properties for low- or moderate-income families. These properties were 

subsidized through a variety of different programs, but they were all provided with long-term

subsidies for specific rental units owned by private landlords. 

During a 10-year period, beginning in the mid-1960s, nearly 700,000 units were built, 

principally under the Section 221(d)(3) Below Market Interest Rate (BMIR) and Section 236 

programs. Properties built under these programs are often referred to as “older assisted” 

HUD-insured multifamily properties. 

In 1974, Congress enacted Section 8 “Lower Income Rental Assistance” under the United 

States Housing Act, a program that could be either project-based or tenant-based. Rather than 

providing a fixed subsidy, tenants would generally pay 25 percent of their income (later 

increased to 30 percent) towards their rent and the government would pay the difference. 

Project-based Section 8 became the new vehicle for the production of multifamily rental 

housing for lower income families. Between the mid-1970s and mid-1980s, HUD committed 

to long-term (generally 20-30 year) project-based contracts for about 650,000 units under the 

Section 8 New Construction/Substantial Rehabilitation (NC/SR) program. 

The Section 8 NC/SR program is often referred to as “newer assisted” HUD multifamily 

housing. About half of the units were built in conjunction with FHA-insured multifamily 

mortgages. The other half was built largely with financing provided by local or State housing 

finance agencies (HFAs) or in rural areas provided through the Rural Housing Section 515 

1 
Evaluation of Mark-to-Market Program

loan program. Section 8 NC/SR funds were also used in conjunction with the HUD Section 

202 loan program to produce housing for elderly and disabled tenants. 

Except for Section 202, new commitments for Section 8 NC/SR were no longer made after 

1983, as the Federal housing policy shifted to reliance on the existing stock and tenant-based 

assistance. Since 1987, the major Federal program for the production of affordable rental 

housing has been the Low Income Housing Tax Credit. 

At the same time as implementation of Section 8 NC/SR, a second form of project-based 

Section 8 assistance was implemented. This was the Section 8 Loan Management Set-Aside 

(LMSA) program. This program assisted tenants and stabilized projects that HUD had earlier 

assisted with interest rate subsidies (“older assisted” properties). Section 8 LMSA contracts 

were initially funded for 15-year periods. As energy prices and other operating expenses 

dramatically rose in the late 1970s and tenant incomes lagged, deeper project-based rental 

subsidies began to be provided to assist tenants and help properties remain financially 

solvent. 

Policy Concerns 

Beginning in the 1980s there was a concern that a significant number of assisted properties 

would be taken out of the subsidized housing market. The initial concern was with “older 

assisted” properties. Many owners of older assisted properties were eligible to prepay their 

assisted mortgages after 20 years. These properties often had below market rents, and HUD 

was concerned that owners would prepay their mortgages and leave the assisted stock in 

order to charge significantly higher market rents to unassisted tenants. To address this 

concern, between 1990 and 1995, HUD implemented a Preservation Incentives program and 

almost 100,000 units were preserved. In exchange for not prepaying their mortgages, owners 

were provided with financial incentives, generally in the form of higher rents and more 

Section 8 assistance. 

In addition to maintaining the stock of affordable housing, HUD has also been concerned 

about the quality of that stock. Most of the HUD-assisted stock was built 20 to 30 years ago. 

A 1995 study documented increased capital needs of the assisted portion of this stock since 

1989, which often was coupled with insufficient financial resources to address the needs.1

 

Overview of Mark-to-Market (M2M) Program Administration 

The M2M program was authorized by the Multifamily Assisted Housing Reform and 

Affordability Act (MAHRA), enacted on October 27, 1997. A key provision of MAHRA 

required an independent office, created within HUD, to manage the M2M program. This was 

the Office of Multifamily Housing Assistance Restructuring (OMHAR). It was expected that 

 

1

 Status of HUD-Insured (or Held) Multifamily Rental Housing in 1995. Abt Associates Inc. Final Report 

prepared for the U.S. Department of Housing and Urban Development (May 1999). 

2 
Evaluation of Mark-to-Market Program

projects would enter the program when their original Section 8 contracts expired in the late 

1990s and early 2000s. The legislation, as amended, stipulated that OMHAR would sunset on 

September 30, 2004. HUD’s authority to enter into M2M agreements continues through 

September 30, 2006, to allow for completion of processing on the last projects. 

OMHAR was set up as a semi-independent entity within HUD and the M2M program

became fully operational in 1999. However, day-to-day responsibility for arranging 

restructuring agreements with individual owners was not the responsibility of OMHAR staff, 

but rather of a network of Participating Administrative Entities (PAEs). The PAEs could be 

public or private sector organizations with experience in working with residents of lowincome housing projects as well as expertise in underwriting and mortgage finance. 

The M2M program itself has the following two specific goals: 

• First, the M2M program is designed to reduce Section 8 subsidies in projects with 

FHA insured mortgages that have project-based Section 8 rents greater than market 

rents. The program authorizes HUD to reduce Section 8 rents to market rent levels in 

these projects. 

In some cases, the project will remain viable with the reduced rents, without further 

action by OMHAR. These are called “Lite” transactions. The processing by the PAE 

is limited and no long-term use agreement is obtained. 

In many cases, however, a simple rent reduction would result in a default because a 

project would no longer be able to pay its expenses and debt with the reduced income. 

M2M therefore authorizes partial or full payments of claim from the Insurance Fund 

to reduce the size of the first mortgage debt. By reducing the monthly mortgage 

payment to the point where market rents can adequately cover it (and appropriate 

project expenses), the Section 8 subsidy is reduced and the project remains viable. 

These types of transactions are called “Fulls.” The processing by the PAE is quite 

substantial and a 30-year Use Agreement, requiring that the property continue to 

provide affordable housing, is obtained from the owner. 

As a practical matter, in a Full transaction, the existing FHA-insured first mortgage is 

paid off in its entirety and a new, generally much smaller mortgage, is put in its place. 

In most, but not all, cases, the new mortgage is also FHA-insured. In standard cases, 

the amount of the claim payment is not forgiven; rather, the project carries this 

amount as additional debt in second and/or third mortgages which are payable only to 

the extent funds are available over time or at the time the project is sold or refinanced. 

• The second goal of the M2M program is the preservation of affordable rental housing 

where it is needed. To this end, three particular features should be noted in reading 

this report: 

• M2M provides for current project repairs where needed, through a 

rehabilitation escrow, which provides that those repairs be completed after 

3 
Evaluation of Mark-to-Market Program

closing. These repairs may include items necessary to bring the property up to 

a reasonable non-luxury standard, such as by the installation of air 

conditioning in areas where all the comparable properties are air-conditioned. 

• M2M also provides for ongoing deposits to the reserves for replacement that 

are designed to assure that the property remains sound during the entire term

of the new mortgage. These are nearly always much greater than were 

required under the existing HUD mortgage. 

• Where a property is needed in the jurisdiction in order to satisfy affordable 

housing needs, and, even after a full payment of claim, the property cannot be 

made viable with market rents, M2M is also able to provide above-market 

rents sufficient to pay for projected operating costs and any new debt service 

needed on the property. These are called “exception rents.” By statute, no 

more than 5 percent of the properties in the program may have exception rents 

that exceed 120 percent of the applicable Fair Market Rents (FMR). 

Study Objectives 

The goal of this study is to evaluate the implementation of the M2M program in terms of cost 

effectiveness and participant satisfaction. This includes an assessment of the financial costs 

and benefits of the program. Claims on the FHA fund and program administration are the 

main financial costs, Section 8 reductions are the main financial benefits, and preservation of 

assisted housing is the main non-financial benefit. An important aspect of the cost estimate is 

determining what the costs would have been without the program. In other words, what is the 

baseline against which the costs and savings are measured? What would happen without the 

M2M program? Would Section 8 continue at current levels? Would all Section 8 projectbased assistance end and would tenants instead receive vouchers? Would properties default?

Along with the measurable financial outcomes of the program are a number of less 

quantifiable benefits, including participant satisfaction (PAEs, property owners, lenders and 

residents), as well as long-term preservation of affordable rental housing. 

One focus of the evaluation is to provide information on how the program has performed to 

date so that lessons can be applied to the remaining term of the program. However, OMHAR 

is set to cease operations in 2004, with the entire Mark-to-Market Program set to sunset in 

2006. Thus, an equally important focus of the evaluation is to inform future policy decisions 

relating to affordable housing and housing subsidies. These lessons can be applied to future 

HUD programs that address policy issues such as dealing with troubled or defaulted 

properties and maintaining the financial and physical viability of stock that is not currently 

troubled. 

Nine specific research topics were addressed through three primary analysis activities. The 

research topics are: 

4 
Evaluation of Mark-to-Market Program

• Comparisons of rent restructurings with full restructurings in terms of costs, viability 

and processing time, including impacts of changes in HUD procedures throughout the 

life of OMHAR. 

• Types of projects (size, unit type, population, location, owner types) that are likely to 

opt for and be accepted for rent restructuring versus full restructuring. 

• Types of projects (size, unit type, population, location, owner type) that are likely to 

close. Other factors considered included the need for rehabilitation, type of PAE, and 

mortgage characteristics (HUD held, bond financed). 

• Does the process assure that the properties remain financially and physically viable as 

affordable rental properties?

• What types of properties (size, unit type, population, owners, location) choose not to 

participate or are rejected by the program, and what happens to these properties?

• How have the tenants been affected by the restructuring, if at all? Does restructuring 

cause tenants to move? Are they being fully informed of the consequences of the 

program on their residency?

 

• Have changes in HUD’s procedures from the beginning of FY 2001 to the end of FY 

2002 led to quicker restructurings, more savings, or more full restructurings? Are 

there any new trends based on new legislative requirements? What has been the effect 

of policy changes (such as the owner incentive package) on the restructuring process?

What are the reasons that some owners do not cooperate with the M2M process or 

refuse to close deals? 

 

• Based on financial analysis, how does the effectiveness of public versus private PAEs 

compare? 

• Based on preservation goals, how do public PAEs compare to private PAEs? 

Methodology and Data Overview 

The research design answered the research questions through three distinct types of data 

collection and analysis: 

• A process analysis (the Process Study) of the administrative mechanisms put in 

place to implement the M2M program. The goal of the process study was to obtain 

stakeholder input regarding the OMHAR process. The primary data collection 

methodology was interviews with a wide range of participants in the restructuring 

process including current and past OMHAR staff, PAE staff, and HUD Office of 

Housing staff. The interviews were supplemented by a review of a range of OMHAR 

5 
Evaluation of Mark-to-Market Program

documents. This portion of the study addresses the research questions on participant 

satisfaction, tenant impacts, effects of changes in process over time, and PAE issues. 

• A retrospective statistical analysis (the Retrospective Study) to measure trends in 

participation levels (e.g., number of eligible properties entering the program and their 

outcomes), estimate savings to the government resulting from the program, evaluate 

the efficiency of program operations, and provide preliminary indications of program

outcomes. This part of the evaluation used a wide range of OMHAR and FHA data on 

properties to provide quantitative assessments of each of the study’s research 

questions. 

• A prospective analysis (the Prospective Study) to examine “typical” OMHARadministered restructurings. This component of the evaluation employed a case-study 

approach that documented the restructuring process for 15 properties undergoing 

restructurings in 2003. It was the primary source of information on tenants and the 

interplay of interests and incentives that shape the outcomes of the restructuring 

process. 

Organization of the Report 

The report is presented in two sections. The remainder of the first section is organized as 

follows: 

• Chapter Two presents the results of the process analysis, documenting the evolution 

of the administrative process and procedures established by OMHAR. 

• Chapter Three presents the findings of the retrospective statistical analysis of 

participation in the M2M process. 

• Chapter Four presents the analysis of estimates of projected savings to HUD derived 

from the M2M restructurings completed to date. 

• Chapter Five presents the analysis of the efficiency of the program operations. 

• Chapter Six examines the program outcome regarding the goal of preserving 

affordable housing stock. 

• Chapter Seven presents a cross-site summary analysis of the data obtained through 

study of 15 multifamily properties undergoing restructurings in 2003. 

The second section contains the 15 detailed case studies for the properties included in the 

Prospective Study component. 

6 
Evaluation of Mark-to-Market Program

2. Process Analysis of the Mark-to-Market Program 

Introduction 

This Chapter presents results of the Process Study component of the Mark-to-Market (M2M) 

assessment. The objectives established for this component are as follows: 

• Identify the non-financial costs and benefits associated to date with the M2M process. 

• Identify problems or issues that have significantly reduced the efficiency of the M2M 

process. 

• Develop recommendations for enhancements to any future M2M-like Federal 

program. 

Data obtained through the Process Study also inform the Retrospective Study (Chapters 3 

through 6). Data for the Process Study were obtained through the following steps: 

• A review of the program documentation developed by OMHAR, including its 

Operating Procedures Guide, policy directives, and training materials. 

• A review of assessments of the M2M process conducted by the General Accounting 

Office (GAO) and HUD’s Inspector General’s Office. 

• Key informant interviews with current and past senior OMHAR staff, including both 

headquarters and regional staff. 

• Key informant interviews with senior staff at eight of the Participating Administrative 

Entities (PAEs) that serve as OMHAR’s underwriting mechanism.

• Key informant interviews with senior staff of the financial advisor that has supported 

OMHAR throughout the evolution of the M2M initiative. 

• Key informant interviews with senior staff at HUD’s Office of Housing who have 

been involved in the initiative. 

• Key informant interviews with a number of owners of Section 8 multifamily 

properties that have had extensive experience both with the Section 8 program and 

with the M2M restructuring process. 

Our discussion begins with a summary of the development of the M2M program and the 

“problem” that the M2M legislation was intended to address. We then discuss the evolution 

of the policies and procedures OMHAR has employed to implement the M2M legislation, 

7 
Evaluation of Mark-to-Market Program

followed by general conclusions about the implementation of M2M drawn from our analysis 

of OMHAR’s procedures and our key informant interviews. 

Background 

Project-based Section 8 assistance was initiated in the 1970s to promote private-sector 

investment in affordable housing. If private-sector owners agreed to construct or rehabilitate 

multifamily units to HUD specifications, the owners could enter into 20-year use agreements 

with HUD. These agreements provided assurance of rent subsidies paid by HUD (with an 

included annual adjustment factor that was set to be no less than zero each year.) In many 

cases the rents specified in the 20-year use agreements were above market in a given 

community. This rent differential was justified as an incentive to promote the construction 

not only of additional affordable housing, but affordable housing that was qualitatively 

superior to housing constructed by Public Housing Agencies (PHAs) in the 1950s and 1960s. 

The annual adjustment factor tended, in many cases, to further increase the disparity between 

the subsidized rents and market rents in a given locality. 

By the late 1980s, more than 800,000 units in approximately 8,500 multifamily projects had 

been financed with mortgages insured by the FHA and supported by project-based Section 8 

housing assistance payments contracts. A typical property development arrangement was to 

establish a General Partnership for construction of one or more properties in a given locality. 

In many cases there was an identity of interest (i.e., some overlap in ownership) between the 

ownership group and the entity that provided on-site property management services. The 

“peaking” of Section 8 construction in the late 1970s and early 1980s resulted in the creation 

of a national cohort of owners with long histories of program participation. A high proportion 

of these owners still had control of properties when the M2M program was implemented. 

By the late 1980s it was known that the Department would be facing a major policy dilemma

in the late 1990s when many FHA-insured Section 8 properties would be coming to the end 

of their 20-year contract terms. The HUD analyses projected that if the contracts were 

renewed with the existing rental adjustment factor, the increase in rental subsidy costs would 

rapidly become unsupportable within HUD’s budget limitations. However, simply freezing 

the level of rent subsidies or reducing the subsidies to market levels could have serious 

programmatic consequences. A reduction in subsidies could cause some owners to leave the 

program or put some properties at financial risk, including those with federally insured 

mortgages. In either case, the stock of affordable housing could be reduced, placing lowincome households at risk of homelessness or massive rent increases, as well as potentially 

representing a large Federal cost in the form of defaulted FHA-insured mortgages. The 

creation of the M2M program was an attempt to find a solution to this policy dilemma. 

8 
Evaluation of Mark-to-Market Program

Demonstration Program 

Recognizing the potentially dire consequences of reducing subsidy costs, both to tenants and 

to the FHA fund, without additional relief, Congress enacted a mortgage restructuring 

demonstration program for Fiscal Year 1996. A modified version of the program was 

authorized for Fiscal Years 1997 and 1998. The objective of this initiative was to obtain the 

voluntary agreement of Section 8 owners to enter into a new use agreement that would 

reduce above-market rents while providing financial incentives for owners to keep their 

properties in the Section 8 portfolio. The owners’ two primary incentives were restructured 

FHA-insured mortgages that reduced expenses and grants to make substantial physical 

improvements to the properties. More than 100 properties underwent restructurings in this 

demonstration program. 

The Multifamily Assisted Housing Reform and Affordability Act 

(MAHRA) 

Beginning in 1996, concern was expressed in Congress that results from the demonstration 

program would not be available soon enough to address the “peaking” of 20-year Section 8 

contract expirations. 

This Congressional concern resulted in passage of the Multifamily Assisted Housing Reform

and Affordability Act (MAHRA), enacted on October 27, 1997. MAHRA established the 

institutional and policy framework for M2M. The main components of that framework are 

presented below. 

While focusing on the same procedural steps as the demonstration program, subsidized rent 

reduction and financial restructuring, the MAHRA legislation introduced some key new 

elements into the strategy for solving the problem of above-market Section 8 rent subsidies. 

These included: 

 

• Rent reductions and associated financial restructurings were to be managed by an 

independent office created within HUD. This was the Office of Multifamily Housing 

Assistance Restructuring (OMHAR). In the original MAHRA legislation it was 

stipulated that the Director of OMHAR should report directly to the Secretary of 

HUD. (In the 2001 reauthorization this stipulation was changed, and OMHAR’s 

Director subsequently reported to the Assistant Secretary for Housing.) OMHAR’s 

sole function was the negotiation of restructured financial agreements with Section 8 

property owners to continue project-based subsidized housing. 

• Owners needed to enter the program if the owner wished to remain in the Section 8 

program. Any Section 8 property with above-market subsidized rents would, at the 

expiration of a Section 8 contract, have to enter into a restructuring agreement that 

reduced the subsidized rents to market or near-market levels. 

9 
Evaluation of Mark-to-Market Program

• While the reduction of rental subsidies was the primary goal of the initiative, it was 

not the sole aim. The preservation of affordable housing was another major legislative 

goal. There were two mechanisms for this. The first was to underwrite properties at 

market rents while assuming that current and future repairs to the property would be 

made. The second was a provision for exception rents, which could be set at up to 120 

percent of the given Fair Market Rent in a given locality. Exception rents would be 

granted where there was a clear demonstrated need for the subsidized housing 

property and above-market rents were necessary to maintain the financial viability of 

the property. 

• Lead responsibility for negotiations with individual owners was not given to 

OMHAR staff, but rather to a network of Participating Administrative Entities 

(PAEs). The PAEs needed to demonstrate experience working with residents of lowincome housing projects as well expertise in multifamily restructuring and 

multifamily financing. The legislative history of this provision gave a clear preference 

to State and local housing agencies to be the primary organizations to perform the 

development and negotiation of the restructuring plans. 

• Tenants were to be involved in the restructuring process. The legislation included 

provisions for required tenant input once a restructuring negotiation began. In 

addition, the legislation provided for funding of up to $10 million for tenant advocacy 

and local community groups that would provide information to tenants at a property 

involved in restructuring negotiations. 

• When a PAE and OMHAR determined that an existing owner was not qualified to 

continue operating a property, preference was to be given to tenant or communitybased nonprofit organizations as alternative owners. 

• Properties that had originally been financed by bonds issued by State or local housing 

finance agencies were exempt from the program. Such properties would be able to 

retain the rents at the higher level stipulated by the pre-MAHRA formula. These 

properties represented approximately 7 percent of the existing Section 8 portfolio. 

The key provisions of MAHRA clearly indicated a legislative intent to reduce the role of a 

“traditional player” in the M2M restructurings. This traditional player was HUD’s Office of 

Housing, responsible for managing the contracts of Section 8 properties. At the same time, 

the preference for State and local housing agencies as PAEs was clearly an attempt to retain a 

public sector perspective in the program. In addition, the legislation intended to promote 

greater participation of nonprofit entities in the ownership and management of Section 8 

properties. 

Interviews with State and local housing agency staff indicated that they put a heavy emphasis 

on the structural rehabilitation facet of the program. In their view, the reduction in rental 

subsidies provided an opportunity to devote a high proportion of the rental savings to needed 

physical improvements. 

10 
Evaluation of Mark-to-Market Program

Although the legislation indicated that the newly created OMHAR would have sole 

responsibility for restructuring, it did not specify how OMHAR was to coordinate its 

activities with the Office of Housing. The Office of Housing retained responsibility for 

managing Section 8 properties until contract expirations. The Office of Housing would retain 

some level of oversight while a property was negotiating a restructuring agreement and then 

would resume management responsibility once a restructuring agreement was concluded. 

Deciding how these parallel responsibilities were to be coordinated was one of the initial 

issues to be addressed as OMHAR began operations and established procedures. 

Initial Organizing of OMHAR, 1998 

The MAHRA legislation explicitly stated that OMHAR was to function as an independent 

entity, originally reporting directly to the HUD Secretary. The Demonstration Program

continued to operate as a separate initiative in the Office of Housing. Once authorized, 

OMHAR had to develop a completely new organizational structure and begin restructuring 

contracts that were to expire on or after October of 1998. It took virtually the entire year of 

1998 to make OMHAR a functioning organization. 

The key steps in the process were: 

• Recruiting a Director and professional staff. 

• Establishing contracts with public and private sector entities that would serve as 

PAEs. 

• Establishing rules and procedures that would provide guidance to the PAEs in their 

negotiations with owners. 

• Specifying procedures for referral of properties from the Office of Housing to 

OMHAR. 

Recruitment of Staff 

Even before the OMHAR organization was in place, senior HUD officials made a key 

decision to operate the M2M program entirely separately from the ongoing demonstration 

program. Until the close of the demonstration program in 2000, there was no coordination of 

activities between the two staffs. The two restructuring efforts ran on separate, but parallel 

tracks. 

Ira Peppercorn, OMHAR’s first Director, was confirmed in the fall of 1998. HUD already 

had begun setting up operations and recruiting professional staff. As a recruitment incentive, 

OMHAR staff was to be paid according to the “Treasury Schedule”; that is, 120 percent of 

the standard pay scale for a given Federal position. The use of this schedule was stipulated in 

MAHRA. In addition, OMHAR received budget resources to set up offices outside the HUD 

headquarters building in Washington, DC. 

11 
Evaluation of Mark-to-Market Program

Professional staff was recruited from Federal and State agencies as well as private-sector 

organizations. Within the public sector, staff was recruited from agencies that had experience 

in dealings with troubled properties, mortgage finance, and underwriting. These included 

HUD’s Office of Housing, Fannie Mae, and the Department of the Treasury. A number of the 

professional staff that came to OMHAR had formerly worked for the Resolution Trust 

Corporation (RTC). 

OMHAR was also provided a budget to obtain ongoing contractual support for financial 

advisory services, including financial modeling and information technology resources. A 

heavy level of contractor support has continued throughout OMHAR’s history. 

Thus, at the onset of the M2M program, OMHAR was provided the regulatory authority and 

necessary funding to operate largely independently of existing HUD program offices and 

data centers. Many informants felt that the level of financial commitment and flexibility was 

a major reason for OMHAR’s ability to establish operations within a short timeframe. 

Participating Administrative Entities (PAE) 

In 1998 OMHAR also began negotiating with organizations that could serve as PAEs. 

Following the intent of the MAHRA legislation, a great deal of this effort was focused on 

State and local housing agencies. This proved to be a long process, with the last agreement 

with a public PAE not signed until 2000. (OMHAR negotiated agreements with 42 public 

entities, but this number was significantly reduced in later years.) 

In these negotiations, it became clear that there were differences between OMHAR and State 

agency staff on the program’s main objectives. OMHAR perceived its mission as reducing 

future pressures on Section 8 discretionary funds and ensuring the financial stability of 

properties that remained in the Section 8 program. Many State and local agencies saw the 

restructurings as an opportunity to significantly rehabilitate Section 8 properties and also 

move a portion of the Section 8 portfolio from private to nonprofit or tenant ownership. 

Procedures Guide 

In addition to staff recruitment during 1998, OMHAR also spent that year developing a 

detailed Procedures Guide. This document was intended to set the underwriting standards for 

negotiations with individual property owners by the PAEs. A key feature of this document 

was OMHAR’s determination that it had legislative authority to negotiate two types of 

restructuring agreements: Fulls, and Lites. 

Full mortgage restructurings involve resetting rents to market levels and reducing mortgage 

debt to permit a positive cash flow. For this type of restructuring the PAEs are required to 

develop plans that reduce the property’s FHA-insured mortgage as well as the rents. Under 

such an agreement the owner receives a renewal of the Section 8 contract at a reduced 

subsidy level and is required to maintain the property as affordable housing for 30 years. The 

owner also enters into a 20-year Section 8 use agreement. 

12 
Evaluation of Mark-to-Market Program

OMHAR also maintained that it had the authority to negotiate another type of restructuring 

agreement, the Lite. In this type of agreement, there is no restructuring of the property’s 

financing. The rents are reduced to market levels, and the owner agrees to a five-year 

renewal of the Section 8 contract. In such cases, it is the PAEs responsibility to ensure that 

the rent reduction does not impair the owner’s ability to operate the property on a sound 

financial footing. Owners opting for a Lite retained a greater amount of flexibility for the 

future use of their property. When agreeing to a Lite restructuring, an owner was required to 

accept Section 8 for only 5 years (as opposed to 20 for Fulls). After 5 years as a Lite the 

owner could explore the possibility of moving the property to the unassisted sector, if, 

perhaps, there had been an improvement in the rental market. 

Procedures for the Office of Housing 

In its first year of operation, OMHAR also finalized procedures for referring properties from

the Office of Housing to the M2M program. These procedures stipulate that four months 

prior to a Section 8 expiration date, an owner wishing to remain in the program must submit 

a request for a contract renewal and a rent comparability study. Based on the analysis of the 

rent comparability data, local HUD offices had the option of renewing a Section 8 contract if 

rents were at or below market. If rents were determined to be above market levels (or the 

owner took the option of electing to go to OMHAR without a comparability study), the HUD 

local office was authorized to renew the contract for one year (at above-market rents) and 

then forward the request to OMHAR to negotiate a restructuring agreement. OMHAR would 

then assign the property to a PAE to negotiate the agreement. These procedures have 

remained essentially constant throughout the operation of the M2M program, although most 

owners have chosen to rely on HUD analyses rather than conduct their own rent 

comparability studies. 

The M2M Process 

Although the underwriting guidelines for M2M restructurings have evolved over time, the 

core administrative steps have remained essentially the same. For a Full restructuring the key 

steps in the restructuring process are: 

• OMHAR receives a referral from the Office of Housing for a property that meets the 

criteria for participation in M2M. 

• OMHAR assigns the property to a Participating Administrative Entity (PAE) that will 

have lead responsibility for developing the restructuring agreement. 

• PAE obtains all requisite due diligence materials from owner of the property. 

• PAE schedules and facilitates an initial tenant meeting that informs tenants of the 

purposes of the restructuring and requests their input regarding needed physical 

enhancements and/or on-site management improvements. 

13 
Evaluation of Mark-to-Market Program

• PAE coordinates third-party rent comparability study, to establish current market rent 

levels for a given locality (owners may submit their own rent comparability studies). 

• PAE coordinates third-party Physical Condition Assessment (PCA) of the property. 

This study documents if there are any health or environmental hazards at the property. 

The study also documents both the short-term and long-term physical needs of the 

property. 

• Working with data provided by the owner as well as data from the rent comparability 

study and PCA, the PAE develops a M2M Financial Plan for the property. The Plan is 

based on software developed by OMHAR. This software model forecasts the cash 

flow requirements of the property for 20 years based on the rent subsidy level deemed 

appropriate by the PAE. The model also takes into account the predicted operating 

expenses of the property as well as its capital needs. 

• PAE schedules and facilitates a second tenant meeting. This meeting focuses on the 

critical capital repairs or enhancements that have been included in the Plan. 

• After review(s) by OMHAR, the PAE submits to the owner a formal Restructuring 

Plan. This Plan specifies the HUD-subsidized rent levels for each category of unit, 

critical rehabilitation items that must be completed in the first 12 months of the Plan, 

plus the amount that must be maintained in the property’s Reserve for Replacement. 

The Plan also presents the financial restructuring proposed by OMHAR that normally 

includes a major pay down of an existing First mortgage, plus issuance of FHAinsured Second and Third Mortgages. 

• Assuming agreement by the owner, the restructuring agreement moves to closing. 

Once an agreement is closed, oversight of the property once again becomes the 

responsibility of HUD’s Office of Housing. 

The First Phase of OMHAR Restructuring, 1999-2001 

OMHAR was not able to engage in restructuring negotiations as quickly as originally 

anticipated. Significant numbers of properties were not referred to PAEs until mid-1999. The 

first completed restructuring agreement, a Lite, was completed in December 1999. The first 

Full restructuring was completed in June 2000. 

Overall, OMHAR’s production in the first two full years of operation did not meet the 

expectations of Congress. A GAO report issued in August 2001 noted that OMHAR had 

completed restructurings for only 41 percent of the 1,558 properties that had been referred to 

it through June 15, 2001. Only 21 percent of these restructurings were Fulls. Processing time 

for completed Fulls was close to 500 days. 

14 
Evaluation of Mark-to-Market Program

A number of factors contributed to the slow rate of completions, particularly for Fulls. These 

include: 

• A steep learning curve for how to evaluate a proposal for a Full restructuring. The 

original version of the M2M Procedures Guide had necessarily been constructed prior 

to restructuring activities. It took some time to obtain an information base of 

operational data needed to provide guidance for underwriting. The lack of precedents 

meant that OMHAR asked for many revisions after submission of an agreement by a 

PAE. PAEs could not anticipate the types of underwriting issues that OMHAR staff 

would identify as they reviewed initial draft agreements. 

• A lack of outreach, particularly to the owner community. There was a natural 

reluctance (especially given earlier legislation imposing a moratorium on 

prepayments) for owners to voluntarily enter into long-term use agreements that 

could significantly reduce the amount of their rental subsidies. There were indications 

that some owners were attempting to draw out negotiations in the hope that some of 

the legislation’s provisions would be rescinded or that a “better deal” could be 

negotiated. It required some time for OMHAR to solicit direct input from the owner 

community. 

• A poor level of coordination and communication with the Office of Housing. The 

number of referrals was dependent on the actions of Housing staff in HUD field 

Offices, and in some regions the number of referrals was significantly below what 

had been anticipated. There was no regular sharing of information between OMHAR 

and HUD staff regarding specific properties or owners. Many informants indicated 

that there was some resentment on the part of some Office of Housing staff, attributed 

to the OMHAR staff’s relative unfamiliarity with the Section 8 Program and the 

premium salaries paid to OMHAR staff. In addition, Office of Housing staff had 

concerns about restructuring agreements, especially with owners considered “problem

owners,” negotiated independently. Such owners had been cited in the past by 

Housing staff for failing to maintain the level of quality of services stipulated in their 

use agreements. These properties would eventually be the Office of Housing’s 

responsibility to administer. For its part, in its first years of operation, OMHAR 

appeared to see little need to draw on the expertise of Office of Housing staff, either 

in the development of procedures or in the details of specific negotiations. 

• A wide variation in the capabilities and efficiencies of the PAEs. In particular, 

OMHAR had concerns about the performance of a significant number of the public 

PAEs. In part, this may have been due to the differing programmatic objectives of the 

public PAEs and OMHAR. However, the most common factor mentioned by 

informants was the inability of Public PAEs to develop internal staff units totally 

devoted to the M2M process. Many of the Public PAEs, because of their size, were 

assigned only a few properties, and PAE staff was only intermittently involved with 

M2M procedures and ongoing OMHAR guidance. This increased the time necessary 

for completing each restructuring. 

15 
Evaluation of Mark-to-Market Program

By the early part of 2000, OMHAR management realized that the organization was not 

meeting expected production goals. There was some concern on the part of OMHAR that its 

operating authority might not be extended beyond September 30, 2001. To address these 

concerns, OMHAR held a series of meetings in the spring and summer of 2000 with major 

stakeholders in the program. These included representatives from owner organizations, State 

and local housing agencies, and nonprofit groups with a longstanding interest in subsidized 

rental housing. 

The outcome of these meetings was the first major revision to the original program design, 

the Owner Incentive Package (OIP). The major element in this package was a provision that 

owners could receive monthly capital recovery payments to provide a recovery of capital and 

a return on the owner’s required payments for property rehabilitation and restructuring 

transaction costs. The owner’s contribution to the closing and rehabilitation costs is repaid 

with interest over 7-10 years. In addition, owners would be able to receive an Incentive 

Performance Fee (IPF), which could be equal to 3 percent of the effective gross income of a 

property. This fee was to be the first priority drawn annually while any subordinate debt was 

outstanding. In addition, the owner was entitled to receive up to 25 percent of any surplus 

cash. 

There was general agreement among all categories of informants that development of the 

OIP was a major step towards increasing the rate and number of Full completions. Under this 

formula, an owner could expect a reasonable return on any major rehabilitation investments 

made at the time of the closing of a Full restructuring. Prior to the development of the OIP, 

there was general agreement that owners saw little opportunity for recovering capital 

investments. Owner reluctance to enter into Full agreements prior to the OIP is indicated by 

the small number of completed Fulls prior to 2001 and their lengthy processing time (over 

500 days). All categories of respondents agreed that without the OIP, OMHAR would never 

have been able to reach the production level of completed Fulls it achieved in 2002 and 2003. 

After the implementation of the OIP, the pace of Full restructures picked up dramatically. 

The view of all OMHAR informants was that without those incentives, M2M would probably 

not have realized any significant volume. 

Congressional concern about the relatively slow pace of restructures led to a request for a 

GAO report on the progress OMHAR had made to date, including a recommendation 

regarding extending OMHAR’s authority to operate past September 30, 2001. The GAO 

report recommended that OMHAR’s authority be extended. The primary reasons for this 

recommendation were: 

• Moving M2M personnel out of OMHAR would seriously reduce the efficiencies 

OMHAR was beginning to obtain after two years of operational experience. 

• Given the specialized expertise required to conduct the property underwriting, it 

appeared most effective to continue an office solely devoted to this function and with 

the needed dedicated resources (such as the financial advisor contractor staff) to 

oversee restructuring transactions. 

16 
Evaluation of Mark-to-Market Program

However, in order to facilitate coordination with the Office of Housing, the GAO 

recommended that OMHAR subsequently be required to report to the Assistant Secretary for 

Housing. Under this arrangement, OMHAR would still be able to act largely independently 

in setting out procedures and OMHAR staff would retain their premium salaries. 

To increase owner cooperation, GAO recommended that OMHAR be given authority to 

make rehabilitation grants to ensure that properties with major rehabilitation needs could be 

made financially viable under an OMHAR-negotiated restructuring. Under these grants the 

owner was required to provide only 20 percent of the funds. In many cases this offered the 

owners an opportunity to leverage Federal funds to make major improvements to their 

properties. 

These recommendations were largely incorporated in a Mark-to-Market Extension Act of 

2001. The Act extended OMHAR’s operational authority through September 30, 2004, and 

gave HUD the authority to continue restructuring activities through September 30, 2006. 

The Second Phase of OMHAR Restructuring, 2001-2003 

Following passage of the Extension Act, OMHAR’s operations passed into a phase in which 

many of the operational problems appeared to have been overcome. Improved performance 

indicators included: 

• Increased productivity in completing restructurings. By late 2002 and throughout 

2003, OMHAR was completing on average 30 restructurings each month. The 

majority of these were now the more complex Full restructurings. 

• Decreased processing time for restructurings. In 2002-2003, Full restructurings were 

taking an average of 11 months. Lite restructurings now averaged 5 months. This was 

close to a 50-percent reduction in processing time, compared to the first 2 years of 

operations. 

• Increased volume of referrals for Full restructuring from the HUD field offices. The 

number of Lite restructurings dropped dramatically. By 2003, they represented only 

about 10 percent of OMHAR’s active portfolio. Thus, the restructurings completed in 

2002 and 2003 represent properties with long-term contracts with the Section 8 

program. 

Interviews with both owners and underwriters indicated greater confidence in the long-term

financial viability of restructurings completed in 2002-2003, compared with those completed 

earlier in the program. 

OMHAR has operated under three different Directors. The first Director was able to craft and 

implement the OPG, which was needed to make the program truly operational. Interim

leadership after his departure maintained strong focus on operations while continuing to 

17 
Evaluation of Mark-to-Market Program

clarify and refine policy. In May 2002, Charles (Hank) Williams became Director and has 

expanded the outreach-to-owners effort, fully supported the emphasis on both production and 

transaction quality, and improved communications and support between OMHAR and 

Housing. 

Williams made a major effort to develop linkages with the Office of Housing. This included 

regular meetings between Housing and OMHAR staff at the headquarters level, as well as 

greater participation of Housing Office field staff in some restructuring negotiations. There is 

general agreement that by 2003 the level of cooperation and coordination between the Office 

of Housing and OMHAR had improved markedly. 

These outreach efforts appeared to improve OMHAR’s operational effectiveness by 

increasing the number and speed of property referrals and improving the ability of OMHAR 

and the PAEs to find solutions to site-specific problems with help from Office of Housing 

staff. 

During the period 2001-2003, OMHAR staff was also able to improve the effectiveness of 

several of its major operational resources. These improvements included: 

• Continuous improvement in the Excel-based “underwriting model” that is a decision 

support tool used by PAEs and OMHAR staff to organize and present key data on 

each property, to judge how best to restructure each property, and to record comments 

about how these decisions were made. Although not a “model” in the technical sense, 

because all decisions are made by the user, this decision support tool is credited with 

playing a key role in supporting OMHAR’s quality assurance efforts. 

• Improved quality assurance through a variety of training and technical assistance 

efforts. Conversely, some early Fulls—completed when PAEs and other program

participants were less experienced—may have difficulty meeting their asunderwritten objectives. 

• Enhancement, during 2003, to the methodology for calculating financial savings. The 

methodology adopted at that time is based on a variant of the “underwriting model” 

and allows a more accurate, property-specific estimate of future 2nd and 3rd 

mortgage payments than the savings methodology used previously. 

• A greater reliance on private-sector PAEs. Even with the legislatively mandated 

preference for public PAEs, private PAEs have always played a major role in 

OMHAR’s restructuring efforts. In the first years of the program they handled 

approximately 65 percent of all properties. By 2003 approximately 90 percent of all 

properties were being handled by private PAEs. Although designated “private,” these 

organizations have had considerable histories of involvement with the public sector. 

More than half of the private PAEs had worked with the Resolution Trust 

Corporation (RTC) on the handling of “distressed properties.” Other PAEs have had 

considerable experience in the use of housing bond financing. 

18 
Evaluation of Mark-to-Market Program

The private PAEs have provided several operational advantages: they had 

professional staff with a good understanding of the underwriting issues surrounding 

the refinancing of multifamily properties; they are large enough to devote staff fulltime to the M2M effort; and the private PAEs have been willing to accept fees 

considerably lower than those requested by public PAEs. The expertise developed by 

these PAEs by 2003 was so considerable that over 90 percent of the public PAEs 

remaining in the program had a private PAE as a partner organization. 

• Continuing refinement and clarification of the underwriting standards employed by 

OMHAR. There are two unique features in the M2M process: first, the operating 

income of a property must be set as the rents to be derived from a market rent level, 

whatever the expenses or rehabilitation requirements of a property; and secondly, the 

underwriting principles employed in a restructuring must lend some confidence that a 

property can operate on a sound footing over the course of a 20-year use agreement. 

In addition, the underwriting standards as of 2003 had taken into account a number of 

major “spikes” in operating costs, such as the rise in insurance rates after 9/11. 

M2M now addresses the issue of reduced operating income through the partial or full 

payment of a claim that will be executed on an existing first mortgage. This payment “pays 

down” most or all of the existing balance on the first mortgage. The obligations in the 

restructured financial package reduce the long-term obligations of the owner compared to the 

pre-existing debt structure. In recent years, OMHAR has decided to employ conservative 

expense estimates to determine a Net Operating Income. For example, OMHAR now 

employs higher estimates of likely vacancy rates and bad debts than would be used for 

standard FHA loans. These conservative estimates can be combined with a lengthy historical 

record of actual expenses to determine if a given rent level will be able to support operating 

expenses. 

All Full packages now include a Reserve for Replacement (RfR) account. This is an escrow 

account from which funds are to be drawn to address capital replacement and maintenance 

needs. In determining the RfR estimates, OMHAR has also evolved to a more conservative 

underwriting standard. These estimates are now based on a 20-year cycle of capital 

replacement requirements, rather than the 12-year estimates for standard FHA loans or the 7- 

to 15-year estimates provided for conventional loans. 

The amount of the projected partial claim payment is also affected by the size of the 

immediate (12-month) rehabilitation requirements, identified mainly through Physical 

Condition Assessments conducted for each Full. These are deemed to be the rehabilitation 

requirements necessary to bring the property to a standard appropriate for its original use in 

the rental market. As of 2003, the amounts required for these critical requirements varied 

widely, from $200 per unit to nearly $10,000 per unit. 

OMHAR’s underwriters believe that the refined underwriting standards have enabled the 

program to make progress toward two core objectives of the MAHRA. First, the 

underwriting standards lend confidence that owners will be able to operate Section 8 

properties through the 20-year use agreement, even with significantly reduced rental 

19 
Evaluation of Mark-to-Market Program

subsidies. Secondly, the inclusion of the RfR estimates for 20 years ensures properties will be 

reasonably maintained over the same period. 

In 2003, OMHAR instituted another underwriting procedure that provided yet another 

cushion in Full restructurings. This was the inclusion of “payables” as a standard expense 

item in a closing. Payables are non-standard expense items included on an owner’s balance 

sheet at the time of a restructuring, such as remaining balances on installed rehabilitation 

items, special tax levies, and other extraordinary expenses. Deleting such items from a 

balance sheet at the time of closing increased the predictive value of the financial model 

developed for the property. Underwriter comments indicated that the inclusion of payables 

significantly enhanced the level of owner cooperation in the restructuring negotiations. 

OMHAR in 2003-2004 

At the time of the project’s data collection period (March-November 2003), the M2M 

initiative was operating as a “mature” program. All of the key players in the process 

(including OMHAR staff, PAE underwriters, and the owner community) had a clear 

understanding as to how the process worked. For the most part, negotiations between owners 

and the PAE were not contentious, but focused on issues at the margin, such as the specific 

items to be included in the 12-month rehabilitation package. Thus, the M2M program

appeared to be meeting key objectives of the MAHRA legislation: reducing the level of 

future Section 8 expenditures, while placing a significant number of Section 8 properties on a 

sound financial footing. 

The operation of the M2M program did show one major divergence from the programmatic 

“vision” posited in MAHRA. The level of public sector and nonprofit involvement in the 

restructuring effort remained low. As mentioned above, in 2003 public sector PAEs were 

involved in less than 10 percent of active restructurings. In addition, the anticipated 

involvement of tenant organizations and nonprofits as owner/managers had not materialized. 

A major barrier to the involvement of nonprofits was the relatively large “upfront” costs 

associated with the restructurings, particularly for the initial rehabilitation requirements and 

other transaction costs. Unless there was a major change in the types of owners or entities 

requesting restructurings, the ownership cadre of Section 8 multifamily properties looked to 

remain much the same as when restructuring began in earnest in 1998. 

However, even though M2M was a mature process in 2003, there remains a significant 

challenge for the program. The operating authority for OMHAR ends on September 30, 

2004. HUD’s authority to complete restructurings continues through September 30, 2006. In 

September 2004, there will still be a considerable number of Section 8 properties requiring 

restructurings. OMHAR estimates the number to be between 2000 and 3000. In 2003, 

OMHAR staff began to develop a Strategic Plan—a road map for moving the restructuring 

function back to the Office of Housing. At the time of this report, however, there was no 

detailed blueprint for this difficult transition. 

20 
Evaluation of Mark-to-Market Program

The uncertainties associated with this situation had already begun to affect OMHAR’s 

performance. OMHAR lost its ability to hire permanent staff in September 2003. This 

promises to become a severe limitation over the next year, as senior staff leaves the program. 

Anticipating OMHAR’s dissolution in September 2004, in the summer of 2003 several key 

staff members who had been instrumental in the development of OMHAR already had left 

the agency for the private sector. This trend will likely continue and accelerate through 

September 2004. 

It is unlikely that HUD will be able to retain the services of senior staff whose previous 

careers were in the private sector. In an era of staff limitations for HUD generally, the Office 

of Housing will have difficulty in placing such individuals in “slots” with acceptable levels 

of compensation. HUD has already issued a policy directive stipulating that these individuals 

cannot automatically bring their OMHAR grade and compensation levels to another HUD 

office. 

The likelihood that much of the “historical memory” of OMHAR will be lost in a transition 

could have a significant negative impact on the restructuring effort from 2004 through 2006. 

There will be two sources of historical memory that can be transferred to a unit within the 

Office of Housing. One is the staff of the contractor organizations that have supported 

OMHAR, almost from its beginning. The other would be the senior managers and 

underwriters at those PAEs that have negotiated significant numbers of restructurings, 

particularly since 2001. 

General Conclusions 

As a result of the Process Study, the project team reached some general conclusions 

regarding operations of the M2M process and OMHAR. These conclusions are as follows: 

• The M2M process has been effective in preserving affordable housing. Particularly as 

the program has operated in 2002 and 2003, it is possible to state that this is one of 

the program’s primary goals. The PAE underwriters normally try to make a case for a 

restructuring even when the need for a property could appear to be marginal (see the 

discussion in Chapter 7). There are few instances where the entrance of a property 

into M2M results in that property leaving the Section 8 program. 

• As a “mature” program in 2002 and 2003, the M2M process is putting in place 

financial arrangements that appear to be financially sound. Concern was expressed by 

both owners and PAE staff regarding some of the restructurings completed in the first 

operational years of OMHAR. These properties may require some type of regular 

monitoring of financial performance over the next several years. 

• The programmatic enhancements introduced by OMHAR in 2000 and 2001 

(particularly the Owner Incentive Package) were remarkably effective in enabling the 

program to reach its objectives. Prior to that time there was a considerable amount of 

reluctance on the part of owners to enter into negotiations for Fulls. By 2002-2003, 

21 
Evaluation of Mark-to-Market Program

this resistance had largely dissipated. In fact, by 2003 some owners who had 

completed Lites were considering the option of coming back into the program to 

negotiate a Full. These owners noted that the Full restructurings as completed in 2003 

appeared to ensure the ongoing financial viability of the Section 8 properties. 

• The private PAEs have proved more effective than public PAEs, largely because 

private PAEs have been able to develop staff units devoted solely to M2M. Their 

effectiveness has been demonstrated by the comparative efficiency of their processing 

time, and the volume of cases they can handle at a given point in time. It should be 

noted that a number of public PAEs have become effective in negotiating M2M 

agreements, usually by employing experienced underwriters on a fee basis. This cadre 

of private and successful public PAEs has developed a detailed understanding of the 

M2M process. This level of staff expertise will need to be drawn on once OMHAR 

ceases to operate as of September 2004. Without this “historic memory” it is difficult 

to see how the M2M process could be operated effectively by the Office of Housing 

beginning in October 2004. 

• Exception rents appear to be a necessary tool to complete a significant number of 

restructurings (see a discussion of several cases in Chapter 7). The most recent data 

show that over 25 percent of properties receive exception rents. In the cases we have 

studied, the use of exception rents appears, in most cases, to be warranted by local 

conditions. It would be beneficial if Rental Assistance Assessment Plans (RAAPs) 

could be conducted early in the restructuring process. The RAAPs are justification for 

exception rents. In some cases, considerable time and expense are devoted to a 

restructuring before this justification analysis is performed. If the RAAP data were 

obtained earlier in the process, PAEs might be able to identify marginal cases where a 

property may not be needed in a given locality. 

• The M2M process appears to provide substantial benefits to the tenant population. 

Section 8 tenants receive the benefit of retaining their existing residence, and the 12- 

month rehabilitation packages included in Fulls often provide considerable immediate 

physical enhancements. Overall, the current Section 8 tenants appear well-served by 

the program. 

• The level of direct tenant involvement in the process has been minimal. In particular, 

tenant organizations have been only sporadically involved in restructuring 

negotiations. The “public-sector” orientation of the MAHRA legislation has not 

become a reality. This is true both of the level of tenant involvement and the 

participation of public-sector organizations in the ownership and management of 

Section 8 properties. 

• It would be beneficial for the M2M program to have the capability to incorporate a 

wider context than a single property. On the whole, the PAE underwriters are 

extremely competent, although their expertise is focused on financial issues. In a 

significant number of cases, it would be useful for M2M participants to consider a 

broader community context. This could include such items as the plans of local 

22 
Evaluation of Mark-to-Market Program

housing authorities or the city’s redevelopment plans. This would enhance the 

opportunity to attract additional community or economic development funds to a 

property. 

23 
Evaluation of Mark-to-Market Program

3. Participation in the Mark-to-Market Program 

Introduction 

The objective of this Chapter is to identify characteristics of the FHA-insured Section 8 

properties that have entered the Mark-to-Market (M2M) program. Our analysis sought to 

determine if those properties had any set of characteristics that differentiated them from

FHA-insured Section 8 properties that did not enter the program. The chapter also compares 

the characteristics of properties based on their outcomes after they entered the M2M 

program: properties that opted for Full compared with Lite restructuring, properties that 

completed the process compared with those that did not, and Fulls that closed at market rents 

compared with Fulls that closed with exception rents. 

Our analysis applied to all properties that had entered the M2M program through July 31, 

2003. This includes properties whose cases were closed and those that were still in the 

pipeline at that time. The data for our analyses were drawn from administrative and tracking 

databases maintained by OMHAR and HUD’s Office of Housing. For each assessment we 

compared the characteristics of different sets of properties using cross tabulations. 

Regression models were also applied in order to isolate the effects of specific characteristics 

on the outcome (e.g., entering M2M) for a given set of properties. Results of the regression 

analysis are presented in the appendix to this chapter. 

The remaining sections of this chapter present the following comparative analyses: 

• A comparison of the property, owner, and location characteristics of M2M properties 

with other Section 8 properties and properties that left the program. 

• A comparison of properties that opted for a Lite restructuring versus those that 

completed a Full restructuring. 

• A comparison of properties that successfully completed the M2M process versus 

those properties that entered the program but did not complete a rent restructuring 

(the Watch-List properties). 

• A comparison of properties that received M2M exception rents versus those that 

completed an M2M restructuring at market-level rents. 

 

• A comparison of the demographic, financial, and physical condition of properties that 

completed a Full restructuring versus other properties in the Section 8 portfolio. 

We begin our presentation with a summary of the status of all FHA-insured properties as of 

July 31, 2003. 

24 
Evaluation of Mark-to-Market Program

Status of Participating FHA-Insured Properties in the M2M Process 

Figure 3.1 shows the distribution of all 9,070 FHA-insured assisted properties by status as of 

the end of July 2003. As of that date, about one quarter of the stock (a total of 2,416 

properties or 27 percent) had entered the M2M process. The remaining three quarters of the 

stock had not entered the program as of July 31, 2003. This includes 1,096 properties (12 

percent of the stock) that opted out of the assistance programs, and 537 properties (6 percent 

of the stock) that were “marked up to market” (in other words they had their rents raised to 

market levels with the goal of preserving them as assisted properties). 

It is not clear what portion of the remaining 5,021 properties (55 percent of the stock) will 

ultimately enter the M2M process. A rough estimate is that approximately somewhere 

between 1,000 and 2,000 additional properties (20 to 40 percent of the stock that has not 

entered yet, and 10 to 20 percent of the total stock) will still enter the M2M process. An 

earlier study by Abt Associates estimated that approximately half of the assisted stock, or 

about 4,500 properties had rents above local market levels.2

 We know that approximately 

2,400 properties have already entered the process, so we can assume that some number under 

2,000 additional properties with above market rents will enter the M2M process as their 

contracts expire. It is likely that the number of properties with above market rents that will 

enter the process will be smaller than 2,000 as some will opt out or not enter the restructuring 

process for other reasons. The remaining properties would not be eligible due to below 

market rents. 

As shown in Figure 3.2, through the end of July 2003, 2,416 properties entered the M2M 

program. Of those 2,416 properties, 1,187 (49 percent) have closed, including 391 as Lite 

restructurings (33 percent of all closed properties) and 796 as Full restructurings (67 percent 

of closed properties). Another 608 properties (25 percent of all properties that entered the 

program) were still in the pipeline on July 31, 2003. Nearly all active pipeline properties (96 

percent) were Fulls. A total of 621 had “Actions Other Than Closing” (AOTC). This includes 

297 properties that were placed on the Watch List and 324 that had discontinued the 

restructuring process without being placed on the Watch List because they were found to be 

ineligible (192) or for other reasons (132). Like Lites, Watch List properties have their rents 

reduced to market levels, but do not have their mortgages re-written. However, in contrast to 

Lites, the PAE believes that these properties may have financial difficulties at these reduced 

rent levels. Watch List properties may re-enter the restructuring process at a later time, while 

discontinued properties may not. 

Figure 3.3 provides further details on properties that entered the process as Full 

restructurings. A total of 796 Full restructurings have closed, including 572 with market rents 

and 224 with exception rents. Another 398 properties that entered the process as Fulls have 

ended the process with an AOTC. This includes 197 properties that were placed on the 

Watch List (102 because the owner refused to execute a restructuring commitment that was 

issued by the PAE, 44 because OMHAR determined that the restructuring plan was not 

financially feasible, 41 because the owner was not cooperative and no restructuring plan was 

issued by the PAE, 10 because the owner was barred from restructuring because of financial 

or managerial improprieties), and 201 properties that were found to be ineligible or otherwise 

 

2 Status of HUD-Insured (or Held) Mutlifamily Rental Housing in 1995, HUD PD&R, May 1999). 

25 
Evaluation of Mark-to-Market Program

were discontinued from the process (79 with rents at or below market, 38 with a conflict 

between State/local financing documents and the restructuring process, 9 for which the 

owner prepaid the mortgage, and 75 for other reasons). 

Figure 3.4 provides further information on properties that entered the process as Lite 

restructurings. A total of 391 Lite restructurings have closed, including 188 Tier 1 

transactions and 203 Tier 2 transactions.3

 Another 223 properties that entered the process as 

Lites have ended the process with an action other than closing (AOTC). This includes 100 

properties that were placed on the Watch List (because OMHAR or the PAE recommended 

Full restructuring but the owner refused) and 123 properties that were found to be ineligible 

or otherwise were discontinued from the process (75 with rents at or below market, 10 for 

which OMHAR or the PAE decided not to renew the Section 8 contract, and 38 for other 

reasons). 

 

3

 As described in Chapter 6 OMHAR has established two forms of Lite transactions—the Lite Tier 1 and the 

Lite Tier 2. If, when using data on current rents and current expenses for the property the DSCR is greater or 

equal to 1.2 the property can be processed as a Lite Tier 1 transaction which requires less analysis than a Tier 2. 

If the DSCR is equal to or greater than 1.1 but less than 1.2, the property can be processed as a Tier 2 Lite. If 

the DSCR is less than 1.1 the property has to be processed as a Full restructuring or not at all.

26 
Evaluation of Mark-to-Market Program

Figure 3.1 

Status of All 9,070 FHA-Insured Section 8 Housing Stock

(as of July 31, 2003)

Closed M2M Lite 391

(4%)

AOTC M2M 621 (7%)

Closed M2M Full 796

(9%)

Pipeline M2M 608 (7%)

Mark-up-to-Market 537 

(6%)

Opt out 1096 (12%)

Other Nonparticipants as

of 7/31/2003 5,021 

(55%)

Figure 3.2 

Status of 2,416 FHA-Insured Section 8 Properties 

that Entered the M2M Process (as of July 31, 2003)

Pipeline Full 582 (24%)

Pipeline Lite 26 (1%)

AOTC Full 398 (16%)

Closed Full 796 (33%)

AOTC Lite 223 (9%)

Closed Lite 391 (16%)

27 
Evaluation of Mark-to-Market Program

Figure 3.3 

Debt Restructurings ("Full") Completed

Chart Represents 1,194 Fulls Completed Through July 31, 2003

Closed at Market Rents

(572 Transactions)

48%

Closed at Exception Rents

(224 Transactions)

19%

Watch List

(197 Transactions)*

16%

Ineligible or Discontinued 

(201 Transactions)*

17%

*Watch List + Ineligible or Discontinued = Action Other Than Closing (AOTC)

Figure 3.4 

Tier 1

(188 Transactions)

31%

Watch List

(100 Transactions)*

16%

Ineligible or Discontinued 

(123 Transactions)*

20%

Tier 2

(203 Transactions)

33%

Lite Completed

Chart Represents 614 Lites Completed Through July 31, 2003

Tier 1

(188 Transactions)

31%

Watch List

(100 Transactions)*

16%

Ineligible or Discontinued 

(123 Transactions)*

20%

Tier 2

(203 Transactions)

33%

Lite Completed

*Watch List + Ineligible or Discontinued scontinued = Action Other T Other Than Closing (AOTC)

Chart Represents 614 Lites Completed Through July 31, 2003

28 
Evaluation of Mark-to-Market Program

Participants in the M2M Program Compared with Non-Participants 

This section compares the locations, property characteristics and tenant characteristics for 

program with those that did not enter the program. A 

ogram for several reasons. The property may not 

b 2M because the rket r

property with above market rent ram

Section 8 contract has not yet expired. Finally an owner can decide to Opt Out of the 

program regardless of contract r ot possible to say if the

reason for non-participation is 1) because rents are above market levels or 2) whether the 

c yet expired, bec le

and the field for contract expirat expiration date (if a contract was

recently renewed, only the next expiration date is available). This section therefore compares 

the characteristics of properties that entered the program (regardless of outcome) with all 

t d not enter the progr less eason, unless we

know explicitly that the reason for non-entry is that the owner indicated an intention to Opt 

O

For all of the following analyses we present tables that provide averages for key property 

characteristics by property type. ributions of the variables are

presented in the appendix to this chapter. Table 3.1 provides definitions and data sources for 

the variables used in the compar

able 3.1

ariables Used in Analysis 

properties that entered the M2M

property may not have entered the M2M pr

e eligible for M contract rent is below the ma

s may not have entered the prog

ent level relative to market. It is n

ent. Alternatively, a

 because the current 

ontract has not ause market rents are not availab

ion only lists the upcoming

in the HUD data files,

hose that di am as of July 31, 2003, regard of the r

ut.

Additional variables and dist

isons.

T

V

Variable Name Definition Variable Source 

Region Includes indicator variables for 

each of the four Census regions: 

Northeast, Midwest, West and 

South. Based on the State in which 

Real Estate Management 

System (REMS) 

property is located. 

Metro location Includes three possibilities: central

olitan

s Bureau

city, suburb, and non-metro. 

Suburb is defined as the noncentral city part of a Metrop

Statistical Area (MSA). 

REMS and Censu

Total Units Continuous variable noting total 

number of units in the property. 

REMS 

Percent 3+ BR units Continuous variable noting pe

of units in the property with 3 o

more bedrooms (range 0-100)

rcent

r

REMS 

Elderly/disabled Indicator variable for a property 

that is designated to serve the 

elderly or disabled. 

REMS 

High-rise, or mixed building

type including high-rise 

Indicator variable for projects that 

include any high-rise buildings. 

REMS and Real Estate

Assessment Center 

(REAC) 

29 
Evaluation of Mark-to-Market Program

T

Variables Used in Analysis 

able 3.1 (Continued) 

Variable Name Definition Variable Source 

Property age Continuous variable based on the 

first occupancy date of the 

development 

REMS 

Owner/developer/mortgage 

sponsor type 

Three ownership types: profit 

motivated, limited dividend, and 

non-profit. 

REMS and REAC 

Tract Vacancy rate Continuous variable, overall 

vacancy rate in the property’s 

Census tract (range 0-100). 

2000 Census 

Tract poverty rate Continuous variable, p

the property’s Census

overty rate in

tract (range

0-100). 

2000 Census 

Tract Rent-to-income ratio Continuous variable, median tract 

rent divided by median tract 

household income in the property’s 

000

Census data 

Calculated from 2

tract (range 0-100). 

REAC Financial Performance 

Score 

Continuous variable. REAC 

financial performance score for 

most recent year available. 

REAC 

REAC Physical Inspection 

Score 

Continuous variable. REAC overall 

physical inspection score for most

recent year available. 

REAC 

Percent capital deficiencies Continuous variable, measures the 

percent of defect items discovered 

during the REAC inspection that 

require large capital outlays (range 

0-100). 

Special tabulation of th

REAC data 

e

Pre-Restructuring Rent-to-FMR 

Ratio 

Continuous variable (range 0-100). 

Pre-restructuring Section 8 contract 

REMS 

rent, divided by the Fair Market 

Rent (FMR) of the property’s 

location. 

Unpaid principal balance per 

unit 

Continuous variable. REMS and F-47 (The 

Multifamily Insurance 

System (MFIS)) 

The statute requires that properties with above market rent enter the M2M program. 

herefore, we expect a primary difference between program entrants and non-entrants to be 

f

) used to measure market rent 

vels in the Housing Choice Voucher program. Because rents in properties assisted under 

the c

“Newe

housing development in targeted areas, and generally had annual increases in rents through 

the annual adjustment factor, we would expect more Newer Assisted properties to enter the 

T

having rents above market levels. We expect program entrants to be located in the types o

locations where program rents have risen more rapidly than market levels, i.e., where 

program rents are high relative to the Fair Market Rent (FMR

le

Se tion 8 New Construction/Substantial Rehabilitation (NC/SR) Programs (termed 

r Assisted” in the tables) often started out at above market levels in order to encourage 

30 
Evaluation of Mark-to-Market Program

program

levels and rent increases were granted based on actual budget needs. 

Our x

propert

propert

have be tation

that no

may ex

general

As can

2M program and those that did not enter the program (excluding those with owners who 

exp t

• 

nts.

 

• participants tend to be assisted under the Section 8 NC/SR Program. These 

properties often started out with above market rents, which were approved in order to 

s

ely

as compared with 

20 percent of non-participants) and in the South (40 percent of entrants are in the 

in other areas, thus properties with

consistently rising rents based on AAF adjustments will have higher rents relative to 

 

• hey

have slightly higher Census tract vacancy rates (average 10 percent versus 8 percent), 

slightly higher poverty rates (average 26 percent versus 22 percent), and slightly 

higher concentrations of minority households (average 41 percent versus 38 percent). 

On the other hand, the homeownership rate is slightly higher in entrant tracts (average 

 

.

4

 In contrast, rents in the “Older Assisted” properties were often set below market 

e pectation is that a primary driver for opting out of the Section 8 program is that 

ies that can be profitable in the unsubsidized market. This would include those 

ies in better neighborhoods, in better physical and financial condition, and those that

low-market rents at the time of contract expiration. Also there may be an expec

n-profit owners are more likely to want to preserve the housing as affordable, so we 

pect to see more Opt-Outs among profit-motivated properties. Non-profits are also 

ly precluded from prepaying their “older assisted” mortgages. 

be seen from Table 3.2,5

 there are differences between properties that entered the 

M

ec to Opt-Out). These differences include the following:

As expected, program entrants had higher pre-program rents compared with nonentrants, averaging 129 percent of FMR, compared with 101 percent for non-entra

(As noted above, the data file does not include market rents. As a proxy, we compare 

pre-program rent to the local FMR.) 

Program

make sure the properties were financially viable. Rents continued to increase through

the application of the AAF, which was never less than zero. Some of the other 

observed differences between entrants and non-entrants result from the difference

between newer and older assisted properties, and are not drivers of participation. For 

example, program participants tend to be newer, to have profit-motivated owners, and 

to have higher per-unit unpaid balances on their mortgages compared with nonparticipating properties. 

• The remaining differences may be driven by differences in the types of properties for

which rents are above market. Properties that enter the M2M program are more lik

to be in non-metro areas (30 percent of entrants are in non-metro are

South compared with 32 percent of non-participants). In these areas, market rents 

may not have been climbing as rapidly as

FMR. 

Entrants tend to be in Census tracts with slightly higher indicators of distress. T

4

 The annual adjustment factor (AAF) could not be less than zero, thus rents could remain unchanged in a 

particular year if the AAF was set to zero that year. 5

 Tables with additional details on the characteristics of properties by type are presented in the appendix to this

chapter. 

31 
Evaluation of Mark-to-Market Program

49 percent versus 46 percent). Overall, these are likely to be locations where market 

• M2M properties tend to be smal u e

etro and southern locations or to the fact that the Section 8 NC/SR 

smaller on average than the older assisted properties. 

m REAC scores are similar between entrants and non-participants, indicating 

physical and financial con n.

ogram entrants have lower average percentages of elderly households (average 27 

t versus 36 percent), and hi percen of eholds e male 

arents compared with non icipan pe versus er

 

rents may not have been climbing as rapidly. 

ler on average (85 nits versus 108), p rhaps linked

to their non-m

properties are

• Progra

similar ditio

• Pr

percen gher tages hous head d by fe

single p -part ts (28 rcent 24 p cent).

6

6

 Because tenant characteristics are missing for some cases and because tenant characteristics are correlated 

with property characteristics they were excluded from the regressions. 

32 
Evaluation of Mark-to-Market Program

Table 3.2

Characteristics of Program Participants and Non-Participants

Opt-Out Entered Program

Non-Participants 

Except Opt Out 

Number Percent Number Percent Number Percent 

Number of Properties 1,096 2,416 5,558 

Number of Units 122,837 205,993 601,145

Location

Census region 

Northeast 125 11% 515 21% 1,089 20% 

Midwest 302 28% 583 24% 1,634 29% 

South 337 31% 971 40% 1,772 32% 

West 332 30% 347 14% 1,063 19% 

Metro Location 

Central City 559 51% 1157 48% 2,903 52% 

Balance of Metro (Suburb) 401 37% 528 22% 1,551 28% 

Non-metro 136 12% 732 30% 1,104 20% 

 

Tract Characteristics

Proportion of Vacant Hsg Units Average 8% 10% 8% 

Homeownership Rate Average 47% 49% 46% 

Poverty Rate Average 18% 26% 22% 

Rent-to-Income Ratio Average 21% 22% 22% 

Percent Minority Average 32% 41% 38% 

 

Property Characteristics

Development Size 

Average Number of Units 112 85 108 

Unit Size 

Average number of bedrooms per unit 1.82 1.77 1.70 

Density 

Proportion of 3+bedroom units 19% 20% 19%

Occupancy Type 

Family 956 87% 1646 68% 3,867 70% 

Elderly/disabled 140 13% 770 32% 1,691 30% 

Building Type 

High-rise/elevator 138 13% 622 26% 1,486 27% 

Other 958 87% 1794 74% 4,072 73% 

Age Average 26 23 26 

HUD Program Type 

Older Assisted 767 70% 702 29% 3,249 58% 

Newer Assisted 329 30% 1714 71% 2,309 42% 

Mortgage Sponsor Type 

Profit Motivated 518 47% 1314 54% 1,996 36%

Limited Dividend 446 41% 876 36% 2,125 38%

Non-Profit 72 7% 217 9% 1,299 23% 

Other 61 6% 9 0% 138 2% 

Mortgage Financed Type 

State HFA Bond Financed 17 2% 199 8% 487 9% 

FHA-Insured Only 1079 98% 2217 92% 5,071 91% 

33 
Evaluation of Mark-to-Market Program

Table

Characteristics of Program Participants and Non-Participants

3.2 (Continued)

Opt-Out Entered Program

Non-Participants 

Except Opt Out 

Number Percent Number Percent Number Percent 

Number of Properties 1,096 2,416 5,558 

Number of Units 122,837 205,993 601,145 

REAC Financial Performance Score 

Average 63 66 68 

REAC Physical Inspection Score Average 78 80 81 

Per Unit Unpaid Principal Balance (UPB)

Average $15,954 $23,054 $18,687 

Change in REAC Capital Deficiency Score 

Decrease or No Change 694 63% 1578 65% 3,624 65% 

Increase 402 37% 838 35% 1,934 35% 

Pre-restructure Sec. 8 Contract Rent to

FMR Ratio Average 89% 129% 101% 

 

Tenant Characteristics 

Number of Properties N.A. N.A. 2,118 5,355 

Number of Units N.A. N.A. 178,635 575,545 

Length of Residence (years) Average N.A. N.A. 4.76 5.22 

Household Size Average N.A. N.A. 2.03 1.94 

Percent Elderly Household Average N.A. N.A. 27% 36% 

Percent Disabled Household Average N.A. N.A. 15% 13% 

Percent Female-headed Single Parent 

Household with Children Average N.A. N.A. 28% 24% 

Percent Racial/ethnic Minority-headed 

Household Average N.A. N.A. 55% 52% 

No

pro

te: Te k. Tenant data were not available for opt out 

perties

s Table 3.2 shows, there are even more pronounced differences when participating 

hey

on in suburban areas and not 

very common in non-metro areas. Thirty-seven percent of Opt-Out properties were in 

concentrations of minority-headed households. (An average of 18 percent poverty and 

32 percent minority compared with 26 and 41 percent, respectively, for participants). 

nant data were only available for a portion of the stoc

A

properties are compared with properties that have owners who expect to leave the program

through opting out. These differences include the following: 

• Consistent with the expectation that Opt-Outs will be in neighborhoods where t

can be profitable at market rents, they are more comm

suburbs compared with 22 percent for program entrants and 28 percent for nonparticipants. Only 12 percent were in non-metro areas, compared to 30 percent for

participants. 

• Similarly, Opt-Outs tend to be in tracts with lower poverty rates and lower 

34 
Evaluation of Mark-to-Market Program

• Opt-Outs are mo arket rents are high in 

many areas. It appears that program

ared 

Out properties tend to be older and to have been assisted under the Section 8

ent increases that

 

• As expected, very few of the Opt-Outs have non-profit owners (only 7 percent, 

compared with 23 percent of othe r s t v

is because they tend ewer as ste erties.

hey are less likely to be financed through State HFA-financed bonds.

ugh we may have expected the condition of Opt-Out properties to be better than 

rs, we find that REAC scores are

s have lower outsta g mo e ba s.

 

• uch lower in Opt-Out properties (average 89 percent), 

o Opt Out.

available for propert s tha -Out of he pro . Data are 

arge share of this gro p of p rties an are no sented.

ary, the table shows that, as expected, properties that enter the M2M program re

. The tend to in the S uth and non-me

 participants tend to have 

higher concentrations of families compared w non-par cipant heir fina cial an

conditions are similar to those of non-participants. 

Out of the Sec 8 prog end t in be eigh oods

cipants or non-participants. Th y are mo est and in 

sub areas. Their rents tend to be below rket levels. We do not have information on 

tics, but property characte s indi hat pes o perti at

r units than other proper nd are like be fa prop s.

re likely to occur in the West where average m

 rent adjustments did not keep pace with the rapid 

increases in market rents in this region. 

• Opt-Out properties are larger on average (112 units) and are more likely to be 

designated as family occupancy (87 percent). Consistent with the prevalence of 

family designation, Opt Outs had larger units—on average 1.82 bedrooms, comp

with 1.7 for non-participants and 1.77 for entrants.

• OptLMSA program. These properties consistently had budget-based r

did not keep up with market rents in hot markets. 

r non-pa ticipating propertie ). Entran s also ha e

few, but that to be “n si d” prop

• T

 

• Altho

othe similar between entrants, non-participants and 

Opt-Out properties. 

 

• Opt-Out propertie ndin rtgag lance

Rents relative to FMR are m

further increasing the motivation t

 

• Tenant data are not ie t Opt t gram

thus missing for a l u rope d t pre

In summ a

properties with high rents relative to FMR

tly more distressed neighborhoods. Program

y be o in tro 

areas and in sligh

ith ti s. T n d

physical

Properties that decide to Opt tion ram t o be tter n borh

than either parti e re likely to be in the W

urban ma

tenant chara

Op

cteris ristic cate t the ty f pro es th

t Out have large ties a very ly to mily ertie

35 
Evaluation of Mark-to-Market Program

Closed Fulls Versus Closed Lites

This section compares the locations, property characteristics and tenant characteristics of 

properties that closed as Lites rather than Fulls. An owner migh o throug

ther than a Full restructuring process if e t ro n

s even without any red in monthly m ge paym nts. T

e owner in closing as Li at the pr es pler and her

se agreement covers a m h sho e eriod T ble 3 )

Ta

Characteristics of Closed Properties – Closed Lites and Fulls 

t prefer to g h a Lite

ra he or sh believes hat the p perty ca remain

viable at market rent uction ortga e he

advantages to th te are th oc s is sim t efore

quicker and that the u uc rt r p ( a .3 .

ble 3.3

All Closed Closed Lite Closed Full 

Number Percent Number Percent Number Percent 

Number of Properties 1187 391 796

Number of Units 104,852 37,256 67,596 

 

Location

Census region 

Northeast 239 20% 71 18% 168 21% 

Midwest 252 21% 78 20% 174 22%

South 540 45% 146 37% 393 49%

West 155 13% 95 24% 60 8% 

Metro Location

Central City 486 41% 197 50% 289 36% 

Balance of Metro (Suburb) 280 24% 108 28% 172 22% 

Non-metro 421 35% 86 22% 335 42%

Neighborhood (Census Tract) Characteristics

Proportion of Vacant Hsg Units Average 10% 9% 10% 

Homeownership Rate Average 52% 48% 54% 

Poverty Rate Average 26% 24% 28%

Rent-to-Income Ratio Average 21% 22% 21%

Proportion of Racial/Ethnic Minorities 

Average 38% 40% 37% 

 

Property Characteristics of Closed Properties

Development Size 

Average Number of Units 88 96 85 

Unit Size 

Average number of bedrooms per unit 1.78 1.68 1.84 

Density 

Proportion of 3+bedroom units 250 21% 71 18% 178 22%

Occupancy Type 

Family 788 66% 254 65% 535 67% 

Elderly/disabled 399 34% 137 35% 261 33% 

Building Type 

High-rise/elevator 301 25% 116 30% 185 23% 

Other 886 75% 275 70% 611 77% 

Age Average 24 26 23

HUD Program Type 

Older Assisted 389 33% 197 50% 192 24% 

Newer Assisted 798 67% 194 50% 604 76% 

36 
Evaluation of Mark-to-Market Program

Table 3.3 (Continued)

Characteristics of Closed Properties – Closed Lites and Fulls

All Closed Closed Lite Closed Full

Number Percent Number Percent Number Percent 

Number of Properties 1187 391 796

Number of Units 104,852 37,256 67,596

 

Mortgage Sponsor Type 

Profit Motivated 659 56% 178 46% 481 60% 

Limited Dividend 394 33% 160 41% 234 29% 

Non-Profit 127 11% 53 14% 74 9% 

Other 6 1% 0 0% 6 1% 

Mortgage Financed Type 

State HFA Bond Financed 80 7% 10 3% 70 9% 

Other 1107 93% 381 97% 726 91% 

Most Recent REAC Financial Performance 

Score Average 68 74 65 

Most Recent REAC Physical Inspection 

Score Average 81 84 80

Per Unit Unpaid Principal Balance (UPB)

Average $20,244 $15,515 $22,567 

Change in REAC Capital Deficiency Score 

Decrease or No Change 768 65% 242 62% 526 66% 

Increase 419 35% 149 38% 270 34% 

Pre-restructure Sec. 8 Contract Rent to FMR 

Ratio Average 128% 119% 133%

 

Tenant Characteristics 

Properties 1135 384 34% 751 66%

Units 99,597 36,691 62,906

 

Length of Residence (years) Average 4.52 4.70 4.43 

Household Size Average 2.01 1.90 2.07 

Percent Elderly Household Average 29% 36% 25% 

Percent Disabled Household Average 15% 14% 16% 

Percent Female-headed Single Parent 

Household with Children Average 28% 25% 29% 

Percent Racial/ethnic Minority-headed 

Household Average 51% 54% 50% 

Note: Te

Our ma tion will

e able nal supports provided by the mortgage 

structuring, including the ability to finance additional repairs. Other differences between

the tw

ondit

uld

nant data were only available for a portion of the stock. 

in hypothesis is that properties that are in better financial and physical condi

b to close as Lites and will not need the additio

re

o groups will be driven by the types of properties that are likely to be in better

c ion (e.g. newer properties).

Another hypothesis is that properties with higher pre-program rents relative to market wo

have a harder time just reducing rents without reducing mortgage costs because the 

percentage reduction in revenues would be higher. Thus, we might expect properties with

higher pre-restructure rent-to-FMR ratios to be more likely to undergo Full restructurings

37 
Evaluation of Mark-to-Market Program

and, therefore, for properties assisted under the Section 8 NC/SR Program (which have 

es in better financial and physical

condition are more likely to close as Lites. Average physical and financial REAC 

4

• Fulls have higher pre-restructuring rents relative to FMR. The average rent to FMR 

ith this, Fulls are more likely to be Newer Assisted properties. More than 

three quarters of all Fulls (76 percent) were Newer Assisted. Lites were evenly 

 

• 

• Fulls tend to be in the South and in non-metro areas. Lites tend to be in the West, and 

 

• Fulls tend to be in Census tracts with higher vacancy rates, higher poverty rates, and 

acial distributions are similar 

in areas with Fulls and Lites. 

 

• tent with being in the South and in non-metro areas, Fulls on average are 

smaller properties, with larger concentrations of large units, though the occupancy 

• In general, tenant characteristics were similar in properties that closed as Fulls and 

e of elderly households and had slightly higher

percentages of minority heads of household. 

Closed Fulls – Market Rent and Exception Rent Properties 

Properties that undergo a Full restructuring generally close at market rents. However, 

exception rents can be requested if the PAE determines that the loss of the project would 

adversely impact the tenants and the community (for example, by displacing tenants who 

would have serious difficulty finding comparable housing), and if the project's rents are 

insufficient to support operating expenses and capital needs. If the exception rent is above 

120 percent of FMR, the transaction must be approved by OMHAR. 

higher rents) to be more likely to undergo Full restructuring. 

As can be seen from Table 3.3 above, there are some differences between properties that 

closed as Fulls compared with Lites. These include the following: 

• The data support the hypothesis that properti

scores are higher for Lites than for Fulls. The average physical score for Lites was 8

compared with 80 for Fulls, and the average financial score was 74 for Lites and 65 

for Fulls. 

for Fulls was 133 percent, compared with 119 percent for Lites. 

 

• Consistent w

distributed by assistance type. 

Consistent with a higher concentration of Newer Assisted properties, Fulls have 

higher per-unit unpaid principal balances on their mortgages. 

they tend to be under-represented in non-metro areas. 

higher rent-to-income ratios compared with Lites. The r

Consis

types were similar. 

Lites. Some minor differences include: a slightly larger average household size and a 

slightly higher percentage of single female-headed families with children for Fulls. 

Lites had a higher percentag

38 
Evaluation of Mark-to-Market Program

As of July 31, 2003, 796 properties closed as Full restructurings, including 572 at market rent 

and 224 with exception rents. On average, the post-restructure rent is about 19 percent above 

market rent for the exception rent deals. Twe n percen ween

110 percent of market, 37 percent had rents between 110 and 120 percent of market, 31 

ercent had rents between 120 and 150 f a c c nt

er than 150 percent of et.

3.4 below we describe the characteris ics of pr perties that have c osed at ma

eption rents. We would expect exception rents to be required in properties that 

ne tial repairs, especially in neigh ood low ive where rket 

rents do not support the costs. 

n in the table, there are only a fe factor that differ etwee exception- nt

an nt transactions. Some differences between market-rent and exception-rent 

pro

s were generally in better condition prior to

idenced by ighe C finan al an ysical sc es.

cal score for marke ent rties was 1 c red with for

erties, and the aver e fi al score was 6 market-rent 

h 61 for exception rent properties).

re in sligh y wor neighborh ods, a illustrated y the

poverty ra s.

 

arket rent properties are more comm n in the outh.

ore common in non-me eas a ss co

 

rent properties tend to be ller t ose lose arket rents. 

so more likely to have fa occu y.

ption rent properties were more likely to be assisted through the older assistance 

while market-rent properties were m

NC/SR Program. 

aracteristics were similar across the two types of properties. The only 

are that market rent properties have higher concentrations of elderly 

holds, but lower concentration house s with abled bers

nty-seve t had rents bet market and 

p percent o market, nd 4 per ent of ex eption re

deals had rents great mark

In Table t o l rket 

rent or at exc

ed substan borh s with relat rents, ma

As can be see w s b n re

d market-re

perties include:

• As expected, market rent propertie

entering the program, as ev h r REA ci d ph or

(The average physi t r prope 8 ompa 77

exception-rent prop ag nanci 6 for

properties compared wit

• Exception-rent properties we

igher vacancy and

tl se o s b

slightly h te

• M o S

 

• Exception rents are m tro ar nd le mmon in suburban 

areas. 

• Exception sma han th that c at m

They are al mily panc

• Exce

programs, ore likely to be assisted through the 

Section 8

 

• Tenant ch

differences

house s of hold dis mem .

39 
Evaluation of Mark-to-Market Program

Table 3.4 

Characteristics of Closed Fulls – Market Rent versus Exception Rent 

All Fulls Full at Market 

Fulls at 

Exception Rent

Number Percent Number Percent Number Percent 

Number of Properties 796 572 224

Number of Units 67596 50311 17285

Location

Census region 

Northeast 168 21% 116 20% 52 23% 

Midwest 174 22% 120 21% 54 24% 

South 393 49% 294 51% 99 44% 

West 60 8% 42 7% 18 8%

Metro Location 

Central City 289 36% 206 36% 83 37% 

Balance of Metro (Suburb) 172 22% 134 23% 38 17%

Non-metro 335 42% 232 41% 103 46% 

 

Neighborhood (Census Tract) Characteristics

Proportion of Vacant Hsg Units Average 10% 9% 12% 

Homeownership Rate Average 54% 54% 54% 

Poverty Rate Average 27% 26% 31% 

Rent-to-Income Ratio Average 21% 21% 21% 

Proportion of Racial/Ethnic Minorities

Average 37% 37% 38%

 

Property Characteristics of Closed Fills

Development Size 

Average Number of Units 85 88 78

Unit Size 

Average number of bedrooms per unit 1.8 1.8 1.8 

Density 

Proportion of 3+bedroom units 178 22% 128 22% 50 22% 

Occupancy Type 

Family 535 67% 373 65% 162 72% 

Elderly/disabled 261 33% 199 35% 62 28% 

Building Type 

High-rise/elevator 185 23% 144 25% 40 18%

Other 611 77% 428 75% 184 82% 

Age Average 23 23 24

HUD Program Type 

Older Assisted 192 24% 107 19% 86 38% 

Newer Assisted 604 76% 465 81% 138 62%

Mortgage Sponsor Type 

Profit Motivated 481 60% 367 64% 115 51% 

Limited Dividend 234 29% 156 27% 78 35%

Non-Profit 74 9% 44 8% 30 13%

Other 6 1% 5 1% 1 0%

Mortgage Financed Type 

State HFA Bond Financed 70 9% 51 9% 19 8% 

Other 726 91% 521 91% 205 92% 

Most Recent REAC Financial Performance 

Score Average 65 66 61

40 
Evaluation of Mark-to-Market Program

Table 3.4 (Continued) 

Characteristics of Closed Fulls – Market Rent versus Exception Rent

All Fulls Full at Market 

Fulls at 

Exception Rent

Number Percent Number Percent Number Percent 

Number of Properties 796 572 224 

Number of Units 67596 50311 17285 

 

Most Recent REAC Physical Inspection 

Score Average 80 81 77

Per Unit Unpaid Principal Balance (UPB)

Average $22,567 $23,596 $19,938 

Change in REAC Capital Deficiency Score 

Decrease or No Change 526 66% 379 66% 147 66% 

Increase 270 34% 193 34% 77 34% 

Pre-restructure Sec. 8 Contract Rent to

FMR Ratio Average 133% 132% 136% 

 

Tenant Characteristics 

Properties 751 538 72% 213 28%

Units 62,906 46,399 74% 16,507 26%

 

Length of Residence (years) Average 4.43 4.6 4.0

Household Size Average 2.07 2.1 2.1 

Percent Elderly Household Average 25% 27% 20% 

Percent Disabled Household Average 16% 15% 18% 

Percent Female-headed Single Parent 

Household with Children Average 29% 29% 29% 

Percent Racial/ethnic Minority-headed 

Household Average 50% 50% 51%

Note: Te

Closed Versus Watch List Properties 

As note

losing

hat

were placed on the Watch List. Properties were placed on the Watch List because the owner 

refused to execute a restructuring commitment that was issued by the PAE (102) or because 

the owner was not cooperative and no restructuring plan was issued by the PAE (141). In 100 

of these latter cases the PAE felt that a Full restructuring was required, but the owner refused. 

Thus, the PAE’s analysis indicated that these properties do not have sufficient resources to 

cover costs without a restructuring, but the owner was only willing to accept a Lite 

restructuring. In some cases OMHAR determined that no restructuring plan was financially 

feasible (44), and in other cases (10) no plan was offered because the owner was barred from

the process due to financial or managerial problems. We can expect that at least a portion of 

the Watch List properties are at risk of future default unless they choose to enter the program

nant data were only available for a portion of the stock. 

d above, not all properties that enter the M2M program complete the program by

c with either a Lite or a Full restructuring. Among the 2,416 properties that entered the 

program through the end of July 2003, 621 had “Actions Other Than Closing” (AOTC). 

There are two groups of properties that are categorized as AOTC. The first includes 324

properties that discontinued the restructuring process, either because they were found to be 

ineligible (192) or for other reasons (132). The second group includes the 297 properties t

41 
Evaluation of Mark-to-Market Program

at a later time. In order to provide information on the types of properties that are at risk, this 

Table 3.5 shows some differences between closed List propert e

the following: 

t properties are more likely to be in the Midwest, while closed properties are 

re concentrated in the South. 

list properties are more concent in central s, while sed prope

ore likely to be in suburbs and no etro areas. 

list properties are smaller than closed properties. 

s tend to have large its. They a e more likely to be 

designated for family occupancy. 

roperties hav non-profit rs.

s are more likely to be Older Assisted compared ith closed

between closed and Watch List properties is that W tch List 

orse financial and ph al condition han closed operties, as

icated by lower REAC scores. This su ests that at l ast a portion f these

or physica bles in the ears to com he avera e

ch List properties was 63, and erage phy ical score

rage financial scor was 86, and average p ysical scor

s 81 for closed properties).

 

roperties have lower conce tions of el -heade seholds a

entrations of female-headed single-parent households with children. 

list properties also have higher c entrations of inority-headed households. 

In s roup of properties that rema t risk follo the M2 rogram

i ies in central cities, serv amily households. These properties are in 

worse condition compared with closed proper further und ring th isky statu

section compares closed properties with those on the Watch List. 

and Watch ies. These includ

• Watch lis

mo

• Watch r

n

ated citie clo rties

are m -m

• Watch

• Watch list propertie r un lso ar

• Relatively few Watch List p e owne

• Watch list propertie w

properties. 

• A key difference a

properties are in w ysic t pr is

ind gg e o

properties will have financial l trou y e. (T g

financial score for Wat

ntrast, the ave

the av

e

s was

76. In co e th h e

wa

• Watch List p

her conc

ntra derly d hou nd

hig

Watch onc m

ummary, the g ins a wing M p

ncludes many propert ing f

ties, ersco eir r s.

42 
Evaluation of Mark-to-Market Program

Table 3.5 

Characteristics of Watch List Versus Other Closed (Fulls and Lites) Properties 

Watch List All Other Closed 

Number Percent Number Percent 

Number of Properties 297 1187

Number of Units 23234 104852

Location 

Census region

Northeast 60 20% 239 20%

Midwest 105 35% 252 21% 

South 90 30% 540 45%

West 42 14% 155 13% 

Metro Location 

Central City 160 54% 486 41% 

Balance of Metro (Suburb) 51 17% 280 24% 

Non-metro 87 29% 421 35% 

Tract Characteristics

Proportion of Vacant Hsg Units Average 11% 10% 

Homeownership Rate Average 48% 52%

Poverty Rate Average 26% 26%

Rent-to-Income Ratio Average 22% 21% 

Percent Minority Average 41% 38%

 

Property Characteristics

Development Size 

Average Number of Units 78 88 

Unit Size 

Average number of bedrooms per unit 1.85 1.78 

Density

Proportion of 3+bedroom units 22% 21% 

Occupancy Type 

Family 229 77% 788 66%

Elderly/disabled 68 23% 399 34%

Building Type 

High-rise/elevator 66 22% 301 25%

Other 231 78% 886 75%

Age Average 25 24 

HUD Program Type 

Older Assisted 129 43% 389 33% 

Newer Assisted 168 57% 798 67% 

Mortgage Sponsor Type 

Profit Motivated 150 50% 659 56%

Limited Dividend 127 43% 394 33% 

Non-Profit 19 6% 127 11% 

Other 1 0% 6 1%

Mortgage Financed Type 

State HFA Bond Financed 18 6% 80 7% 

Other 279 94% 1107 93% 

REAC Financial Performance Score Average 63 68 

REAC Physical Inspection Score Average 76 81 

Per Unit Unpaid Principal Balance (UPB)

Average $19,341 $20,244 

43 
Evaluation of Mark-to-Market Program

Tab

Chara ) Properties

le 3.5 (Continued) 

cteristics of Watch List Versus Other Closed (Fulls and Lites

Watch List All Other Closed 

Number Percent Number Percent 

Number of Properties 297 1187

Number of Units 23234 104852

Change in REAC Capital Deficiency Score 

Decrease or No Change 196 66% 768 65% 

Increase 101 34% 419 35%

Pre-restructure Sec. 8 Contract Rent to FMR 

Ratio Average 122% 128%

Tenant Characteristics 

Number of Properties 281 1135 

Number of Units 21,541 99,597 

Tenant Data 

Length of Residence (years) Average 4.38 4.5 

Household Size Average 2.15 2.0 

Percent Elderly Household Average 21% 29%

Percent Disabled Household Average 14% 15%

Percent Female-headed Single Parent 

Household with Children Average 32% 28% 

Percent Racial/ethnic Minority-headed 

Household Average 59% 51%

Note: Tenant data were only available for a portion of the stock. 

Fulls Versus All Other Properties 

A key goal of the M2M program is preserving affordable rental housing. The main group of 

properties that is being preserved as a result of the program is the group that closed as Fulls. 

Properties that closed as Lites could have survived at market rents without the M2M 

program. Properties that are on the Watch List may not be preserved as affordable housing, 

because a portion of these properties may default. Thus, this section compares properties that 

closed as Fulls with the remaining properties (excluding Opt-Outs, which left the assisted 

stock). 

Table 3.6 shows that the types of properties being preserved through the program have the 

following characteristics: 

• Virtually half (49 percent) of all Fulls are in the South and only 8 percent are in the 

West. In contrast, among the other properties only a third (32 percent) are in the 

South and 19 percent are in the West. 

• Fulls are more likely than other properties to be in non-metro areas and less likely to 

be in central cities. 

44 
Evaluation of Mark-to-Market Program

• The only Census tract characteristics that vary between Fulls and other properties are

racts with higher

homeownership rates and higher poverty rates, perhaps reflecting that they are more 

likely to be in non-metro areas. 

 

h their non-metro and southern locations, Fulls are considerably 

an other properties, averagin its (compared with 105 units on average 

are much more likely to be Newer isted (78 p t, co d with 44

ent for other properties) and are mu ore likely to have profit-motivated 

ners (60 percent compared with 38 percent for other properties). They are mu

ely to have non-profit owners (9 p ent compa ith 2 ent for oth

ies).

al and financial conditions were s ar across oups perties, as

imilar REAC scores. 

 

centrations of househo ds headed lderly mem ers and higher 

s of female-headed single-parent households. 

I oup of properties that is be g preserv a result of he M2M

p to be in non-metro areas, mainly in the South, and to be serving 

f s.

homeownership rates and poverty rates. Fulls are in t

• Consistent wit

smaller th g 85 un

for other properties). 

• Fulls Ass ercen mpare

perc ch m

ow ch 

less lik erc red w 1 perc er

propert

• Physic imil the gr of pro

indicated by s

• Fulls have lower con l by e b

concentration

n general terms, the gr in ed as t

rogram are more likely

amily household

45 
Evaluation of Mark-to-Market Program

Table 3.6 

Property Characteristics – Fulls Versus All Others 

Fulls 

All Others 

Except Opt Out 

and Pipe Line

Number Percent Number Percent 

Number of Properties 796 6,570

Number of Units 67,596 690,469

Location 

Census region 

Northeast 168 21% 1,278 19%

Midwest 174 22% 1,911 29% 

South 393 49% 2,122 32%

West 60 8% 1,259 19%

Metro Location 

Central City 289 36% 3,439 52% 

Balance of Metro (Suburb) 172 22% 1,796 27% 

Non-metro 335 42% 1,335 20% 

Tract Characteristics

Proportion of Vacant Hsg Units Average 10% 9% 

Homeownership Rate Average 54% 47%

Poverty Rate Average 28% 22%

Rent-to-Income Ratio Average 21% 22% 

Percent Minority Average 37% 39% 

Property Characteristics 

Development Size

Average Number of Units 85 105 

Unit Size 

Average number of bedrooms per unit 1.84 1.71 

Density 

Proportion of 3+bedroom units 22% 19% 

Occupancy Type 

Family 535 67% 4,554 69% 

Elderly/disabled 261 33% 2,016 31% 

Building Type 

High-rise/elevator 185 23% 1,757 27% 

Other 611 77% 4,813 73% 

Age Average 23 26 

HUD Program Type 

Older Assisted 192 24% 3,683 56% 

Newer Assisted 604 76% 2,887 44% 

Mortgage Sponsor Type 

Profit Motivated 481 60% 2,510 38% 

Limited Dividend 234 29% 2,519 38% 

Non-Profit 74 9% 1,403 21% 

Other 6 1% 139 2% 

Mortgage Financed Type 

State HFA Bond Financed 70 9% 536 8% 

Other 726 91% 6,034 92% 

REAC Financial Performance Score Average 65 68 

46 
Evaluation of Mark-to-Market Program

Table 3.6 (Continued) 

Property Characteristics – Fulls Versus All Others

Fulls 

All Others 

Except Opt Out 

and Pipe Line

Number Percent Number Percent 

Number of Properties 796 6,570 

Number of Units 67,596 690,469 

REAC Physical Inspection Score Average 80 81

Per Unit Unpaid Principal Balance (UPB) 

Average $22,567 $18,695

Change in REAC Capital Deficiency Score 

Decrease or No Change 526 66% 4,269 65%

Increase 270 34% 2,302 35% 

Pre-restructure Sec. 8 Contract Rent to FMR 

Ratio Average 133% 104% 

 

Tenant Characteristics 

Number of Properties 751 6,315

Number of Units 62,906 660,037

Length of Residence (years) Average 4.43 5.14

Household Size Average 2.07 1.95

Percent Elderly Household Average 25% 35%

Percent Disabled Household Average 16% 13%

Percent Female-headed Single Parent 

Household with Children Average 29% 24% 

Percent Racial/ethnic Minority-headed 

Household Average 50% 53%

Note: Tenant data were only available for a portion of the stock. 

47 
Evaluation of Mark-to-Market Program

4. Program Savings 

Introduction 

his chapter estimates potential future savings to the Federal Government derived from all 

com e

h M2M restructurings (e.g., FHA claims and 

dministrative costs) with potential savings. The savings estim

repaym

Our an

• 

al

emes and presents a more realistic 

estimate of the financial performance of the properties. 

• 

• The third component examines property characteristics that are associated with 

he first component of the analysis presents details on the total estimates of costs and 

ypes and presents details on the components of costs and savings. 

ponents provide cross tabulations that identify characteristics 

ssociated with savings separately for Lite and Full restructurings. Results of multivariate 

2M program. 

T

pl ted Mark-to-Market (M2M) transactions as of July 31, 2003. Our estimates are based

on comparisons of costs associated wit

a ates include Section 8 and any 

ents to second and third mortgages that may offset claims costs to the FHA fund. 

alysis has the following three distinct components: 

The first component provides estimates of savings to be derived from M2M 

restructurings compared to the costs of program implementation. This comparison 

results in three estimates of total savings. The first is an upper limit that assumes the

most optimistic outcomes for the financial performance of the M2M properties. The

second is a lower limit that assumes the most pessimistic outcomes for the financi

performance of the same properties. The third estimate, corresponding to estimates

reported by OMHAR is in between the two extr

The second component of the analysis identifies property characteristics that are 

associated with savings in Lite restructurings. 

savings in Full restructurings. 

T

savings across property t

The second and third com

a

regressions that disaggregate a set of possible cost determinants, such as type of owner or 

size of the property, are presented in the appendix to this chapter. 

The remainder of this chapter is organized as follows: 

• Total savings and costs resulting from the M

• Factors affecting savings for Lites. 

• Factors affecting savings for Fulls. 

 

48 
Evaluation of Mark-to-Market Program

Total Savings and Costs Resulting From the Mark-to-Market 

Program

 is 

converted to a second (and sometimes a third) mortgage. The second and third 

mortgages may be repaid over time if the property generates sufficient revenue. In 

calculating the costs associated with a Full restructuring, we make various 

assumptions about the proportion of the partial payment of claim that is offset by 

repayments to the second and third mortgages. 

• For Watch List properties there are savings associated with reduced Section 8 rents. 

Because rents are reduced without associated reductions in mortgage payments, there 

are no immediate costs due to FHA claims, but possible costs associated with future 

mortgage defaults of these properties. 

• Administrative costs and PAE costs are not presented for specific properties, but are 

added to the overall estimate of program costs. 

Section 8 Savings 

The key component of savings to the Federal Government resulting from the M2M program

is reductions in the Section 8 rents. Table 4.1 shows the distribution of rent reductions per 

unit across the types of transactions. The data on Section 8 savings for each project were 

provided by OMHAR, based on the pre-restructuring and post-restructuring rents and the 

number of Section 8 units. The annual savings are assumed to start in the year following 

closing and are expected to continue for 20 years. 

The estimate of savings is dependent on the baseline case used for comparison. Under the 

scenario presented here, the baseline case for comparison assumes that the Section 8 program

subsidies would continue at their pre-restructuring level for the next 20 years (without any 

annual adjustment). If we assumed in contrast, that without M2M, rents would have been set 

 

The following are components of costs and savings that affect the M2M total results: 

• Savings associated with reduced Section 8 rents. For Lites, the only program impact 

is the reduced Section 8 rents. 

• Partial payment of claim and expectations regarding repayments of second and third 

mortgages. For Fulls there are savings associated with reduced Section 8 rents and 

also costs associated with FHA claims. In order to ensure that the post-restructuring 

mortgage is supportable with reduced rents, as part of a Full restructuring, a portion 

of the FHA mortgage is placed in a subordinate position, generally a second or third

mortgage,7

 resulting in a partial payment of claim. The portion that is written off

then

7

 For certain non-profit owners the portion of the mortgage that is not supportable by the new mortgage is

written off. 

49 
Evaluation of Mark-to-Market Program

to pre-restructuring prevailing market levels upon current contract expiration, then estimated 

and, if we

tion 8 rents would increase based on historic trends, the estimate provided 

would be an underestimate of total savings. 

As shown in the table, the average per-unit-month reduction in rent for Lite restructurings 

w 6. This represents an average 11-percent decrease in rents. Rent

reductions were higher for Full restructurings and for Watch List properties. Across all Full 

restructurings, the average rent reduction was $98 (15 percent) and the m n was $8 so

15 percent). Rent reductions in properties that closed at market rents averaged $106 per unit 

m edian of $87 (16 percent). Despite their above-market rents after 

closing, Fulls that closed with exception rents nonetheless had reduced rents on average. The 

mean and median savings were $79 and $68, respectively (11 percent and 13 percent). Rent 

reductions were also high for Watch List properties—the average was $92 per unit month (14 

percent), with a median of $69 (12 percent). Rent r ions ar sented hically

both dollars of rent reduction (in Figure 4.1) and as a percent of pre-restructure rent (in 

F

savings resulting from rent reductions would be virtually erased. On the other h

assumed that Sec

as $73, with a median of $5

edia 0 (al

onth (17 percent), with a m

educt e pre grap for

igure 4.2).

50 
Evaluation of Mark-to-Market Program

Table 4.1 

Savings and Cost Components of Completed Lite Restructurings and Full 

Restructurings 

Full Restructuring

Lite

Restructuring

Closed At

Mkt Rent 

Exception

Rent All Watch List

Rent Reduction (Per-Unit Month) 

Average $73 $106 $79 $98 $92 

Median $56 $87 $68 $80 $69 

Min $1 $1 -$113 -$113 $1 

Max $364 $610 $594 $610 $395 

Rent Reduction as % of Pre-restructuring Rent 

Average 11% 17% 11% 15% 14% 

Median 10% 16% 13% 15% 12% 

Min 0% 1% -23% -23% 1% 

Max 38% 49% 41% 49% 53% 

Partial Payment of Claims (Per-Unit) 

Average N.A. $17,099 $18,384 $17,437 N.A. 

Median N.A. $16,200 $19,408 $16,556 N.A. 

Min N.A. $885 $2,555 $885 N.A. 

Max N.A. $74,564 $42,051 $74,564 N.A. 

Partial Payment of Claims as a Percentage of Unpaid Principal Balance (Per-Unit) 

Average N.A. 74% 95% 80% N.A. 

Median N.A. 78% 99% 86% N.A. 

Min N.A. 1% 52% 1% N.A. 

Max N.A. 120% 108% 120%a N.A. 

 

Present Value of Expected Recoveries 

Average N.A. $7,339 $6,710 $7,162 N.A.

Median N.A. $6,815 $6,307 $6,714 N.A.

Min N.A. $0 $0 $0 N.A.

Max N.A. $28,669 $19,193 $28,669 N.A.

Present Value of Expected Recoveries of 2nd and 3rd Mortgages as % of Partial Payment of Claims (PPC)

Average N.A. 48% 42% 46% N.A.

Median N.A. 46% 40% 44% N.A.

Min N.A. 0% 0% 0% N.A. 

Max N.A. 100% 100% 100% N.A. 

a

 In some cases partial payment of claim figures include repair escrows. Thus, in rare cases the estimate of PPC 

can be larger than the outstanding mortgage balance. 

51 
Evaluation of Mark-to-Market Program

Figure 4.1 

0 20 40 60

1,484 M2M Transactions with Rent Adjustment Through August 1, 2003

Distribution of Rent Reduction

per Unit per Month

240 80 100 120 140 160 180 200 220

Number of Properties

-125-100-75 -50 -25 0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 600 625

Rent Reduction per Unit per Month ($)

Figure 4.2 

0 25 50 75 100 125 150 175 200 225 250 275 300

Number of Properties

-25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Rent Reduction as a Percent of Pre-restructure Rent (%)

1,484 M2M Transactions with Rent Adjustment Through August 1, 2003

Distribution of Rent Reduction

as a Percent of Pre-restructure Rent

52 
Evaluation of Mark-to-Market Program 

Table 4.2 shows the net present value of total rent reductions across property types for all 

properties that have closed through July 31, 2003, for the next 20 years. The table shows that 

total rent reductions for all Lites resulted in savings of $418.7 m

savings of $1.1 billion. Rent reductions for W

savings of $273.7 m

53 

illion. Fulls resulted in total 

atch List properties resulted in aggregate 

illion.8

 Thus, the net present value of rent reductions over the next 20 

years totals $ n. 

Partial Pay

For Lite properties, the entire cost/savings (aside from PAE fees and administrative costs) 

results from the rent reduction. For Fulls, there are also costs associated with the partial 

payment of claim ents of the second and third 

mortgages. For W

these properties that m y not be financially viable with reduced rents and no offsetting partial 

payment of claim on the mortgage. 

Table 4.1 above shows the m ent of claim for Full restructurings. 

(This is also shown graphically in Figure 4.3 in dollar amounts per unit and in Figure 4.4 as a 

percent of un ipa ce).9

 The average pre-restructuring outstanding mortgage 

for the Fulls was $22,567 per unit ($23,596 for those that closed at market rent and $19,938 

for those that closed with exception rents). The average partial payment of claim across all 

Fulls was $17,437 ($17,099 for market rent transactions and $18,384 for exception rent 

transactions). The average m was 74 percent for market-rent transactions and 

95 percent for exception-rent transactions. 

There is an expectation that at least a portion of second and third mortgages will be repaid, 

reducing v pact of the partial payments of claim. As discussed below, there is a 

range of possible values for the repayment (ranging from a low that assumes that none will 

be repai g ass ost likely that the true amount 

will be som he etw e two extremes. Table 4.1 shows OMHAR’s expectations 

regardin e present value of recoveries. The average expected repayment is $7,162 per unit. 

This represents about 46 percent of the partial payments of claims. (Present values of 

expected recoveries are presented graphically in Figure 4.5. Recoveries as a percent of PPC 

are shown in Figure 4.6.) 

 

1.

m

79

ent of Claim and Savings for Full Restructuring Properties 

 billio

 (PPC), which are partly offset by future repaym

atch List properties, there is an additional cost of default for a portion of 

a

agnitude of the partial paym

paid princ l balan

ortgage claim

 the o

d to a hi

ew

g th

erall

h t

re i

 im

hat

n b

um

ee

es that all will be repaid). It is m

n th

8

 The W list pr as Full Watchlist or Lite Watchlist depending on whether they 

entered the program

9

 The t ruct hat closed through July 31, 2003 was 796. Only 699 of these had nonzero partial paym im. to a zero PPC. Any balances from a 

project' e-restru esidual ent accounts are used to offset the claim 

against nsurance fund. Thus, a M2M transaction could end up with a zero PPC if the project had a 

large pre-restruct ance from s. The second situation that could lead to a zero PPC is if the 

pre ure m gage is HU . Figures 4.3, 4.4, and 4.6 include only the properties that had non-zero 

PPC re 4 based on th ngs analysis conducted for the Full Restructurings. It is based on 790 of the 

796 cl alysis excludes 6 transactions for which cost information was incomplete in 

the OM ysis. (The "OMHAR savings" file provided by HUD only included 790 

Fu

atch

otal num

s pr

 the HUD i

struct

gu

HAR M

op

 as a Lite or a Full. 

ents

ctu

erties are categ

 of

re R

orized

ngs t

ere are two situations that could lead

Receipts and Reserve for Replacem

ber of Full rest

 cla

uri

 Th

ure bal

ort

.5 is

l tra

IS

 these account

-re eld

s. Fi

osed Ful

lls.) 

D-h

e savi

he an

 of the anal

ns

 at 

act

the

ion

 tim

s. T

e
 54 Table 4.2 Total Rent Reductions by Property Type FY of Completion Lite Full Closed At MKT Rent Full Closed At Exception Rent Total Fulls Lite Watchlist Full Watchlist Total Wa

2000 $264,987,251 $2,494,144 $17,078 $2,511,222 $54,075,390 $5,992,333 $60,02001 $117,071,702 $299,419,829 $97,218,380 $396,638,209 $13,454,077 $73,145,702 $86,52002 $23,988,953 $335,351,509 $78,305,690 $413,657,199 $9,250,752 $63,189,620 $72,42003 (thr. 7/31/2003) $12,713,580 $217,203,869 $70,167,924 $287,371,793 $12,049,510 $42,497,582 $54,5

Total $418,761,486 $854,469,350 $245,709,073 $1,100,178,423 $88,829,730 $184,825,238 $273,6
Evaluation of Mark-to-Market Program

Figure 4.3 

0 10 20 30 40 50 60 70 80 90 100

Number of Properties

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

80,000

Per-Unit Partial Payment of Claims ($)

699 Full Restructurings with Partial Payment of Claims

Distribution of Partial Payment of Claims per Unit

Figure 4.4 

0 25 50

699 Full Restructurings with Partial Payment of Claims

175 200 100 125 150 75

Number of Properties

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Partial Payment of Claims/UPB (%)

Distribution of Partial Payment of Claims as % of UPB

55 
Evaluation of Mark-to-Market Program

Figure 4.5

0 10 20 30 40 50 60

0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 24000 26000 28000 30000

Per-Unit PV of Expected Recoveries ($)

790 Full Restructurings Closed as of Early August 2003

Distribution of PV of Expected Recoveries per Unit

70

Number of Properties

Figure 4.6 

0 25 50 75 100

Number of Properties

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

PV of Expected Recoveries as a % of Partial Payment of Claims

699 Full Restructurings with Partial Payment of Claims

Distribution of the Present Value of Expected Recoveries of

2nd and 3rd Mortgages as % of Partial Payment of Claims

56 
Evaluation of Mark-to-Market Program

The data on partial payments of claim, and expected recoveries were provided by OMHAR.

The methodology used for developing estimates of partial payment of claim and recoveries is 

a

Second and Thir ecoveries s ar after cl xcel

workbook estimates recoveries by year, during the term of the loans. The workbook 

the pri e on the n maturity, percent of

the PAE-determined and OMHAR-approved estim

property at that time. 

ments 

for

is det e size of cash flow o perty, which

is an output of the OMHAR Underwriting Model worksheet. For the purposes of 

estimating 2nd a age recove kbook ass negative

Surplus Cash am e most rec inancial s uld

fter the . Post-M2M is first ap g the

Surp sh de if any cas s it is app nd

mortgage payment, and the owner, in accordance with the transaction as closed. 

ll of the seconds and thirds are repaid. The present value of full

coveries of the second and third mortgages is presented in Table 4.3 by fiscal year of 

completion. A second scenario, the lower limit scenario assumes that none of the seconds or 

thirds is repaid. Under this scenario the expected present value of repayments is zero. In 

reality, repayments will be some place in between these two extremes. Table 4.4 presents 

OMHAR’s estimate of the present value of repayment by fiscal year of completion. This 

scenario assumes that a portion of the seconds and thirds will be repaid. The estimates are 

based on property characteristics. 

 

s follows: 

• d mortgage r tart in the ye osing. The E

estimates ncipal balanc o

ate of residual value of the 

te due upon limited to 80

• OMHAR’s calculation does not have a general assumption regarding the repay

of the 2nd and 3rd mortgages. Rather t s amount for each property

er th

he repayment

each year mined by the post-M2M f the pro

nd 3rd mortg ries, the wor umes that any

ounts from th ent audited f tatements wo

remain a M2M closing cash flow plied to erasin

lus Ca ficit and then h flow remain lied to IPF, 2

• Small amounts for IRP and out-year Section 8 funds may be recaptured by HUD 

(typically, these resources are fully utilized in the restructure, but for some

transactions, a portion or all of the funds are to be recaptured by HUD). 

• For cash flows occurring in the current or prior years, no discount factor is applied. 

Cash flows occurring in future years are discounted at a long-term discount rate 

provided by OMB. This rate varies by the year in which the analysis is made. The rate 

for FY 2003 was 5.05 percent, and the rate for FY 2004 is 4.94 percent.10

In order to estimate the costs and savings associated with the program for Fulls, we need to 

make assumptions regarding the repayment of the second and third mortgages that are issued

as part of the restructuring process. We present three scenarios. Under the upper limit 

scenario we assume that a

re

10 OMHAR developed this methodology in consultation with OMB. Charles Wilkens of the Compass Group 

provided details on the methodology used. 

57 
Evaluation of Mark-to-Market Program

Table 4.3 

Present Value of Full Recoveries of 2nd and 3rd Mortgages

FY of Completion 

Full Closed at 

MKT Rent 

Full Closed at 

Exception Rent All Fulls 

2000 $1,479,099 $148,533 $1,627,632 

2001 $110,276,187 $25,549,073 $135,825,260 

2002 $168,870,488 $43,940,212 $212,810,700 

2003 

(thru. 7/31/2003) $118,591,462 $67,354,058 $185,945,520 

Total $399,217,235 $136,991,876 $536,209,111 

able 4.4

MHAR’s Estimates of Present Value of Recoveries of 2nd and 3rd Mortgages

T

O

FY of Completion 

Full Closed at 

MKT Rent 

Full Closed at 

Exception Rent All Fulls 

2000 $1,140,773 $86,081 $1,226,854 

2001 $100,756,027 $20,587,209 $121,343,236 

2002 $159,006,106 $37,526,682 $196,532,788 

2003 

(thru. 7/31/2003) $110,076,577 $54,948,035 $165,024,612 

Total $370,979,484 $113,148,006 $484,127,490 

able 4.5 shows the estimate of total savings (or costs) resulting from the Full restructurings, 

d third mortgages under the 

tive scen secon are repaid in full, 2) a portion of the

s s a eep R’s e ), and 3) none are repaid.

It is likely that the actual savings will be between the first and third scenarios. As can be seen 

f he table, if seco mortgages are repaid in full, net savings resulting from the 

F ould total abou n. A treme, if there are no repayments of 

t s, the up c $15 er the intermediate 

scenario, the wil et sa over er $468 million. Under 

ny scenario, properties that close at market rents will result in savings. The exception-rent 

properties will result in savings if, in fact, all seconds and thirds are repaid, but will result in 

T

excluding administrative and PAE costs. This takes into account the total rent reductions, 

partial payments of claim and the recoveries of the second an

three alterna arios: 1) the

re repaid (in k

ds and thirds

econds and third ing with OMHA stimates

rom t nd and third

ulls w t $520 millio t the other ex

hese mortgage Fulls will end osting about million. Und

Fulls l result in a n vings to the g nment of ov

a

net losses if they are not. 

58 
Evaluation of Mark-to-Market Program

Tab 4

et Savings Resulting From Closed Fulls

Upper Bound Scenario—Assumes All Seconds and Thirds are Repaid 

le .5

N

FY of Completion 

Full Closed at 

MKT Rent 

Full Closed at 

Exception Rent All Fulls 

2000 $1,133,285 -$462,778 $670,507 

2001 $178,262,005 $60,698,487 $238,960,492 

2002 $184,638,325 $21,974,903 $206,613,228 

2003

(thru. 7/31/2003) $91,956,565 -$17,469,803 $74,486,762 

Total $455,990,180 $64,740,809 $520,730,989 

Intermediate Scenario—Assumes that a Portion of Seconds and Thirds are 

Repaid Based on OMHAR Estimates 

FY of Completion 

Full Closed at 

MKT Rent 

Full Closed at 

Exception Rent All Fulls 

2000 $794,960 -$525,230 $269,730 

2001 $168,741,844 $55,736,623 $224,478,467 

2002 $174,773,943 $15,561,372 $190,335,315 

2003 

(thru. 7/31/2003) $83,441,680 -$29,875,826 $53,565,854 

Total $427,752,427 $40,896,940 $468,649,367 

Lower Bound Scenario—Assumes No Repayments of Seconds 

and Thirds 

FY of Completion 

Full Closed at 

MKT Rent 

Full Closed at 

Exception Rent All Fulls 

2000 -$345,813 -$611,311 -$957,124 

2001 $67,985,817 $35,149,414 $103,135,231

2002 $15,767,837 -$21,965,310 -$6,197,473 

2003 

(thru 7/31/2003) -$26,634,897 -$84,823,861 -$111,458,758 

Total $56,772,943 -$72,251,066 -$15,478,123

Defaults and Savings for Watch List Properties 

W atch List, rents are reduced to ma

m age is no re

r ut c r d re o addre n ng

physica e s h ing proc

ose that do not may face financial hardship and may possibly default. To estimate the 

otential costs of this group of properties to the FHA fund, we divided Watch List properties 

into three categories, based on likelihood of default, using a methodology adapted from one 

developed by HUD.11 Under this methodology, cash flow is calculated assuming: 

 

hen properties are placed on the W rket levels but the 

ortg t restructu d. Watch List properties are in a vulnerable position—incomes are 

educed b osts are not educed, an no funds a provided t ss a y outstandi

l issu s. Watch List propertie can enter t e restructur ess at a later time, but 

th

p

11 The methodology was developed by Judy May of the Office of Housing. 

59 
Evaluation of Mark-to-Market Program

• Rents are reduced to market level. 

• Operating costs are based on historical costs (for the most recent year of available 

data, usually 2002). 

usually 2002). 

 

Requir e a u ro

lanc d e.

he first group includes 38 properties that can cover ongoing operating expenses as well as

at

ons. We assume that no properties in the group that can cover costs with reduced 

nts will default. We assume that all properties in the third group (i.e., those that cannot 

even cover operating costs) will default right away. We present two scenarios regarding the 

pper bound scenario assumes that none of this group will default, and the 

wer bound scenario assumes that all will default. We thus present upper and lower bounds 

re

ing forward. Savings equal rent

ductions minus claims. (See Table 4.6) 

Properties Never Default

• Vacancies are based on historical rates (for the most recent year of available data, 

• ed mortgag payment w s calculated sing data f m REMS on mortgage

ba e, term, an interest rat

T

mortgage costs, even with the reduced rents. The second group includes 122 properties th

can cover operating costs and a portion of mortgage costs with the reduced rents. The third 

group includes 137 properties that cannot cover operating costs with the reduced rents. In 

order to arrive at an estimate of the cost of default, we have made some simplifying 

assumpti

re

second group. The u

lo

on the estimate of the total savings for the Watch List properties. Given experience to date 

that many Watch List properties are in fact returning to the restructuring process and few a

defaulting, we do not expect a large number of defaults go

re

Table 4.6 

Net Savings Resulting From M2M Watch List Properties 

Scenario #1: Upper Bound Scenario—Assumes “at Risk” Watch List

FY of 

Completion 

Rent 

Reductions 

Lite 

Watchlist 

Rent 

Reductions 

Full 

Watchlist 

Rent 

ReductionAll Watchlist 

Potential 

Claims from 

Group 3 

Watchlist 

Properies 

Potential 

Claims from 

Group 2 

Watchlist 

Properties 

Total 

Potential 

Claims from 

Watchlist 

Total Costs/ 

Savings 

2000 $54,075,390 $5,992,333 $60,067,723 $13,705,168 $0 $13,705,168 $46,362,555 

2001 $13,454,077 $73,145,702 $86,599,779 $46,280,009 $0 $46,280,009 $40,319,770 

2002 $9,250,752 $63,189,620 $72,440,372 $55,679,003 $0 $55,679,003 $16,761,369 

2003 

(thru 7/31) $12,049,510 $42,497,582 $54,547,092 $50,928,828 $0 $50,928,828 $3,618,264 

Total $88,829,730 $184,825,238 $273,654,968 $166,593,008 $0 $166,593,008 $107,061,960 

60 
Evaluation of Mark-to-Market Program

Scenario #2: Lower Bound Scenario—Assumes All “at Risk” Watch List Properties Default 

Immediately 

FY of

Completion 

Rent 

Reductions 

Lite 

Watchlist

Rent 

Reductions

Full Watchlist 

Rent 

ReductionAll Watchlist 

Potential 

Claims from 

Group 3 

Watchlist

Properies 

Potential

Claims from

Group 2 

Watchlist

Properties

Total 

Potential

Claims from

Watchlist 

Total Costs/ 

Savings 

2000 $54,075,390 $5,992,333 $60,067,723 $13,705,168 $43,617,406 $57,322,574 $2,745,149

2001 $13,454,077 $73,145,702 $86,599,779 $46,280,009 $45,555,071 $91,835,080 -5,235,301

2002 $9,250,752 $63,189,620 $72,440,372 $55,679,003 $46,560,058 $102,239,061 -$29,798,689 

2003

(thru 7/31) $12,049,510 $42,497,582 $54,547,092 $50,928,828 $100,397,841 $151,326,669 -$96,779,577

Total $88,829,730 $184,825,238 $273,654,968 $166,593,008 $236,130,376 $402,723,384 -$129,068,416

T for the s t ad re te

result in total savings of $273.6 million. The two extremes for costs of default for the Watch 

L 66.6 d $ lli reg h L tie

will have an impact on savings ranging from a savings of $107 million to a loss of $129 

m

2M

osts

he rent reductions Watch Li t properties hat have h their rent duced to da

ist properties are $1 million an 402.7 mi on. In agg ate, Watc ist proper s

illion. 

Total Savings 

In addition to the direct savings and costs associated with the restructurings, the entire M

program includes additional costs—i.e., the administrative costs of running OMHAR and

payments to the PAEs for completing the restructurings. 

Table 4.7 shows OMHAR costs for 1999 through 2003. Over the course of five years, a total

of $163 million was spent on administrative costs, including salaries and staff expenses, 

operating expenses, ITAG/OTAG grants, and PAE costs. These costs are not necessarily 

attributable to specific properties, so in order to calculate overall program savings these c

are subtracted from the estimates of total savings presented above. 

61 
Evaluation of Mark-to-Market Program

Table 4.7

Office of Multifamily Housing Assistance Restructuring (OMHAR) 

Summary of OMHAR Costs to Date—Through July 31, 2003 

FY 2003

FY 1999 FY 2000 FY 2001 FY 2002 July 31, 2003 TOTAL

Salaries and Expenses 

Salaries $1,713,575 $7,871,433 $9,954,847 $9,212,339 $7,165,252 $35,917,446 

Travel 75,875 423,823 332,537 260,218 136,173 1,228,626 

Other Services (Contracts) 190,710 292,962 209,248 68,320 82,843 844,083 

Other Expenditures 

(supplies & printing) 34,996 76,808 76,770 44,093 5,695 238,362 

Total S&E $2,015,156 $8,665,026 $10,573,402 $9,584,970 $7,389,963 $38,228,517 

 

Contracts (FHA Fund) $1,383,062 $4,079,194 $7,478,058 $8,765,061 $10,082,742 $31,788,117 a

Total Staff & Operating

Costs $3,398,218 $12,744,220 $18,051,460 $18,350,031 $17,472,705 $70,016,634 

 

Grants 

Section 514 (ITAG/OTAG) $2,250,000 $3,496,840 $3,477,689 $4,184,360 $1,135,957 $14,544,846

 

PAE Compensation $ - $14,196,665 $22,768,885 $24,667,027 $16,950,044 $78,582,621 

 

Total Costs – OMHAR $5,648,218 $30,437,725 $44,298,034 $47,201,418 $35,558,706 $163,144,101 

a crease for FY 03 for Con (FHA Fund) is utable to the in ed acti tfolio M nd

C anagement C

T 4.8 shows ate s ultin first of O

o tions. This nt part s, Ne al

expecte aym ond ortgages, potential defaults of W

roperties, and administrative costs for OMHAR. Depending on the assumptions regarding 

e repayments of the seconds and thirds for Full restructurings and the outcomes for Watch 

List properties, the NPV of overall savings over the next 20 years ranges from a low of $111 

million under the lowe a high of $883

illion under the higher bound assum

The in tracts attrib creas vity in the Por anagement a

ash M ontracts.

able the aggreg avings res g from the five years MHAR’s

pera includes re reductions, ial payment t Present V ue (NPV) of

d rep ents of sec and third m atch List 

p

th

r bound assumptions (or $4 per unit per month) to

m ptions (or $30 per unit per month). Under the 

intermediate scenario the net present value of total savings is $831 million over the next 20 

years (or $24 per unit per month). 

Table 4.8 

Net Savings Resulting From M2M Program

Scenario #1: Upper Bound Estimate–Assumes “at Risk” Watch List Properties 

Never Default and Full Recoveries of 2nd and 3rd Mortgages

FY of 

Completion Lite All Fulls All Watch List OMHAR Costs 

Total 

Savings/(Costs) 

1999 $0 $0 $0 $5,648,218 -$5,648,218 

2000 $264,987,251 $670,507 $46,362,555 $30,437,725 $281,582,588 

2001 $117,071,702 $238,960,492 $40,319,770 $44,298,034 $352,053,930 

2002 $23,988,953 $206,613,228 $16,761,369 $47,201,418 $200,162,132 

2003 $12,713,580 $74,486,762 $3,618,264 $35,558,706 $55,259,900 

Total $418,761,486 $520,730,989 $107,061,960 $163,144,101 $883,410,334 

62 
Evaluation of Mark-to-Market Program

Scenario #2: Intermediate Scenario—Assumes “at Risk” Watch List Properties 

ever Default and Recoveries of 2nd and 3rd Mortgages as Expected by OMHAR 

for ll

N

Fu s

FY of 

Completion Lite All Fulls All Watch List OMHAR Costs 

Total 

Savings/(Costs) 

1999 $0 $0 $0 $5,648,218 -$5,648,218

2000 $264,987,251 $269,730 $46,362,555 $30,437,725 $281,181,811

2001 $117,071,702 $224,478,467 $40,319,770 $44,298,034 $337,571,905

2002 $23,988,953 $190,335,315 $16,761,369 $47,201,418 $183,884,219 

2003 $12,713,580 $53,565,854 $3,618,264 $35,558,706 $34,338,992 

Total $418,761,486 $468,649,367 $107,061,960 $163,144,101 $831,328,712

Scenario #2: Lower Bound Estimate—Assumes all “at Risk” Watch List Properties Default 

Immediately and No Recoveries of 2nd and 3rd Mortgages for Fulls 

FY of 

Completion Lite All Fulls All Watch List OMHAR Costs 

Total 

Savings/(Costs) 

1999 $0 $0 $0 $5,648,218 -$5,648,218 

2000 $264,987,251 -$957,124 $2,745,149 $30,437,725 $236,337,551 

2001 $117,071,702 $103,135,231 - $5,235,301 $44,298,034 $170,673,598 

2002 $23,988,953 -$6,197,473 -$29,798,689 $47,201,418 -$59,208,627 

2003 $12,713,580 -$111,458,758 -$96,779,577 $35,558,706 -$231,083,461 

Total $418,761,486 -$15,478,123 -$129,068,416 $163,144,101 $111,070,846 

Factors Affecting Savings for Lites 

Table 4.9 presents findings regarding the factors that are correlated with savings in the Lite 

transactions. Savings in these transactions equal the value of the rent reductions. The table 

presents the average savings by property characteristics and describes the characteristics of 

properties with below-average and above-average savings. 

Savings are driven by the extent to which pre-restructuring rents are above market levels. 

Thus, we expect to find that high savings properties are those with characteristics associated 

with high pre-program rents relative to FMR. 

Key factors relating to savings for Lites are the following: 

• As expected, savings are higher for properties with higher pre-restructure rents 

relative to FMR. The average savings for properties with rents below FMR are $7,609 

per-unit, while the savings for properties with rents above 150 percent of FMR are 

$19,054 per unit. 

63 
Evaluation of Mark-to-Market Program

• Average savings are highest for properties in the Northeast (averaging $16,292 per

eraging only $8,036 per unit over

20 years). 

• Savings are highest for central city properties (averaging $13,358 per unit) and lowest 

for non-metro properties, (averaging $9,219). 

few observed differences in saving on Cen t charac s.

eownership rates, which are higher in lowings tracts, and probably associated with non-metro locations. 

gs tend to be slightly higher in smaller p s and in rties with ller

s. However, savings are lower in elderly/d properti

s are slightly higher in Newer Assisted prope ies compared with Older 

.

unit over 20 years) and lowest in the Midwest, (av

• There are

The only observed differences are in hom

s based sus trac teristic

sav

• Savin ropertie prope sma

unit isabled es.

• Saving rt

Assisted properties

64 
Evaluation of Mark-to-Market Program

Table 4.9 

Factors Affecting Savings for Lite Transactions 

Lite

Average Savings = $12,143 

Average 

Savings

Across All 

Lites of this

Type 

Savings

Above

Average 

Savings

Below

Average 

Number of Properties 385 147 238

Number of Units 35,870 13,439 22,431

Average Savings $12,143 $22,928 $5,482

Location

Census region 

Northeast $16,292 27% 13%

Midwest $8,036 14% 24%

South $11,391 32% 42% 

West $13,575 27% 22% 

Metro Location

Central City $13,358 56% 46%

Balance of Metro (Suburb) $12,313 29% 27% 

Non-metro $9,219 16% 26%

 

Neighborhood (Census Tract) Characteristics

Average Proportion of Vacant Housing Units 8% 8%

Average Homeownership Rate 45% 51% 

Average Rent-to-Income Ratio 23% 21% 

Average Proportion of Racial/Ethnic Minorities 45% 37% 

Average Poverty Rate 25% 23%

 

Property Characteristics

Average Development Size (Number of Units) 91 94 

Average Unit Size (N number of bedrooms per unit) 1.62 1.72 

Proportion of 3+bedroom units 16% 20% 

Occupancy Type 

Family $12,365 62% 66%

Elderly/disabled $11,690 38% 34% 

Building Type 

High-rise/elevator $11,557 38% 24%

Other $13,508 62% 76% 

Age 

Average 25.9 26.5 

HUD Program Type 

Older assisted $11,873 46% 54% 

Newer assisted $12,265 54% 46% 

Mortgage Sponsor Type 

Profit Motivated $11,282 47% 45%

Limited Dividend $11,535 37% 43%

Non-Profit $14,877 17% 12%

Other N.A. 0% 0%

Mortgage Financed Type 

State HFA Bond Financed $10,058 2% 3% 

Other $12,199 98% 97% 

Average Per Unit Unpaid Principal Balance (UPB) $17,556 $14,158 

Average Most Recent REAC Financial Performance 

Score 72 73 

Average Most Recent REAC Physical Inspection Score 86 86 

65 
Evaluation of Mark-to-Market Program

Table 4.9 (Continued) 

Factors Affecting Savings for Lite Transactions

Lite

Average Savings = $12,143 

Average 

Savings

Across All 

Lites of this

Type 

Savings

Above

Average 

Savings

Below

Average 

Number of Properties 385 147 238 

Number of Units 35,870 13,439 22,431 

Average Savings $12,143 $22,928 $5,482

 

Pre-restructure Sec. 8 Contract Rent to FMR Ratio 

Average 129% 113% 

 Rent < FMR $7,609 9% 29% 

FMR< Rent <= 150% of FMR. $12,624 72% 68%

Rent greater than 150% of FMR $19,054 19% 3%

Change in REAC Capital Deficiency Score 

Decrease or No Change $12,362 65% 60%

Increase $11,294 35% 40%

PAE Type 

Public $11,287 39% 45% 

Private $12,785 61% 55% 

Restructuring Type 

Closed at Market Rent $12,143 100% 100% 

Closed at Exception Rent N.A. N.A. N.A. 

• rs

• pal balances on their mortgages. 

tured by private PAEs

Tab 4

transactions. Savings occur when the net present value of the rent reduction and anticipated 

paym ortgage exceed the partial payment of claim. For this 

a i s

regardi

anticipa

characteristics of above-average, below-average, and negative-savings properties. 

Savings are similar for properties with profit-motivated and limited-dividend owne

and are higher for properties with non-profit owners. 

• Savings do not differ based on REAC scores. 

High-savings properties have higher unpaid princi

• Savings are slightly higher for properties that were restruc

($12,785) compared with public PAEs ($11,287). 

Factors Affecting Savings for Fulls 

le .10 presents findings regarding factors that appear to drive savings in the Full

re ents of the second and third m

an lys s we use the intermediate estimate of savings that relies on OMHAR’s expectation

ng repayments of second and third mortgages. As shown in the table, there is an 

ted net loss for 30 percent of the closed Full transactions. 

The table presents the average savings by property characteristics and describes the 

66 
Evaluation of Mark-to-Market Program

Key factors relating to savings for Fulls are as follows:

• As with Lites, average savings are highest for properties in the Northeast, averaging 

$15,315 per unit over 20 years. Nearly half (47 percent) of high-savings Fulls are in 

the Northeast. Again, as with ngs w

$1,896. Savings in the South averaged $2,750, and 59 percent of all transactions with 

re highest for suburba erties, averaging $8,023 per unit, and lowest for 

non-metro properties, averaging $2,673. Savings for central city properties averaged 

,781 per unit.

 

are no significant diffe savings b on Censu t characte s.

 

vings tend to be higher per arger pro s and in pr ties with sm r

d smaller concentrations of large units. They also tend to be higher in elderly 

roperties.

 

• Savings are higher in Older Assisted properties (average $8,222) compared with 

4,997).

 

for properties w h limited-dividend owners ($10,256 on average) 

owned by profit-motivated owners ($3,286 on average). 

age $7,225 for properti with non it owners.

REAC scores are associated with higher saving . (Savings aver ge

erties with financial REAC scores above 80, compared with 

es with scores of 0 or lowe

 

es were not ass iated wit ings.

 

d, savings are high roperties w igher pre cture rent

FMR. The average s for prope with rents w FMR is ,

ings for propertie rents abov percent o R is $11,0 er

it.

higher for propert were rest red by priv AEs ($6,0

with $3,976).

 

ingly, properties th at market rents have mu gher avera

pared with exception-rent properties. The average savings for ma ent

operties is $7,649 compared with $652 for exception-rent properties. 

Lites, savi ere lowest in the Midwest, averaging

losses occurred in the South. 

• Savings a n prop

$7

• There rences in ased s trac ristic

• Sa unit in l pertie oper alle

units an

and non-high-rise p

Newer Assisted properties (average $

• Savings are highest it

and lowest for properties

Savings aver es -prof

• Higher financial s a

$12,106 per unit for prop

$1,924 for properti 4 r).

• Physical REAC scor oc h sav

• As expecte

e to

er for p ith h -restru s

relativ avings rties belo $342

while the sav s with e 150 f FM 63 p

un

• Savings are ies that ructu ate P 59

compared

• Not surpris at close ch hi ge

savings com rket-r

pr

67 
Evaluation of Mark-to-Market Program

Table 4.10 

Factors Affecting Savings for Full Transactions 

Full 

Positive Savings

Average Savings = $11,098 

Average 

Savings

Across All 

Fulls of this 

Type 

Savings

Above

Average 

Savings

Below

Average 

Negative

Savings

(Loss) 

Number of Properties 790 192 361 237

Number of Units 67,065 18,219 30,840 18,006

Average Savings $5,674 $22,480 $5,044 -$6,981 

 

Location

Census region 

Northeast $15,315 47% 17% 7%

Midwest $1,896 9% 24% 28% 

South $2,750 32% 53% 59%

West $8,950 12% 6% 6% 

Metro Location

Central City $7,781 44% 34% 32%

Balance of Metro (Suburb) $8,023 30% 21% 16% 

Non-metro $2,673 26% 45% 52% 

Neighborhood (Census Tract) Characteristics

Average Vacancy Rate 8% 8% 9% 

Average Homeownership Rate 44% 55% 59%

Average Rent-to-Income Ratio 24% 21% 20%

Average Proportion of Racial/Ethnic

Minorities 48% 34% 33%

Average Poverty Rate 30% 27% 26%

 

Property Characteristics

Average Development Size (Number 

of Units) 95 85 76 

Average Unit Size (Number of 

bedrooms per unit) 1.76 1.80 1.96 

Proportion of 3+bedroom units 20% 21% 25% 

Occupancy Type 

Family $5,492 67% 62% 74% 

Elderly/disabled $6,142 33% 38% 26% 

Building Type 

High-rise/elevator $3,565 40% 23% 10% 

Other $12,876 60% 77% 90% 

Age Property Age 23.9 23.4 22.6 

HUD Program Type 

Older assisted $8,222 32% 23% 18% 

Newer assisted $4,997 68% 77% 82% 

Mortgage Sponsor Type 

Profit Motivated $3,286 46% 62% 71% 

Limited Dividend $10,256 45% 26% 23% 

Non-Profit $7,225 9% 12% 6% 

Other $5,432 0% 1% 0% 

Mortgage Financed Type 

State HFA Bond Financed $7,706 11% 9% 8% 

Other $5,477 89% 91% 92% 

Average Per Unit Unpaid Principal 

Balance (UPB) $24,198 $22,022 $22,290 

68 
Evaluation of Mark-to-Market Program

Table 4.10 (Continued)

Factors Affecting Savings for Full Transactions

Full 

Positive Savings

Average Savings = $11,098 

Average 

Savings

Across All 

Fulls of this

Type 

Savings

Above

Average 

Savings

Below

Average 

Negative

Savings

(Loss) 

Number of Units 67,065 18,219 30,840 18,006

Average Savings $5,674 $22,480 $5,044 -$6,981

Average Most Recent REAC

Financial Performance Score 71 64 55 

Average Most Recent REAC Physical 

Inspection Score 83 83 80

Average Pre-restructure Sec. 8 

Contract Rent to FMR Ratio 146% 132% 125% 

 Rent < FMR $342 4% 8% 14% 

FMR< Rent <= 150% of FMR. $4,592 57% 71% 72%

Rent greater than 150% of FMR $11,063 40% 21% 14% 

Change in REAC Capital Deficiency

Score 

Decrease or No Change $6,094 66% 66% 66% 

Increase $4,935 34% 34% 34%

PAE Type 

Public $3,976 11% 20% 22% 

Private $6,059 89% 80% 78% 

Restructuring Type 

Closed at Market Rent $7,649 80% 81% 52%

Closed at Exception Rent $652 20% 19% 48%

69 
Evaluation of Mark-to-Market Program

5. Analysis of Program Efficiency 

Introduction 

e

of

ome, 

e major processing milestone, the type of PAE, and the timing of the restructuring in 

relation to OMHAR’s underwriting and processing regimes. The last section provides a 

mary and conclusions. 

general, Full restructures are more complex and involve more steps to complete than Lite 

restructures. Observers have also noted that the unwillingness of some property owners to 

cooperate in the restructuring tends to prolong the processing time. 

In particular, many owners have been reluctant to agree to Full restructurings because of the 

cash they must contribute to address the property’s rehabilitation needs and the long-term use 

agreement that accompanies a Full restructure. Other factors attributable to the slow 

 

This chapter examines the efficiency of the Mark-to-Market (M2M) program over time. 

Efficiency is measured by the length of processing time—the shorter the time, the greater th

efficiency. 

Efficiency questions center around the processing time for carrying out the major stages

the restructuring process. The following questions regarding program efficiency are 

addressed in this chapter: 

• How do Lite restructurings and Full restructurings differ in terms of processing time?

• How did the changes in HUD/OMHAR procedures throughout the life of OMHAR 

affect processing time? 

• How do the public and private PAEs differ in terms of efficiency measured as 

processing time?

In this chapter, we first provide the background to concerns over the program’s efficiency 

and describe some key policy changes brought about by OMHAR designed to reduce 

processing time. The second section discusses our analytic approach and its limitations. 

Findings regarding the change in processing speed over time are presented in the subsequent

three sections. Our analysis compares processing times by the type of restructuring outc

th

sum

Background 

Since its inception, a major focal point of the M2M program has been the efficiency of its 

operation. Housing industry groups and policy makers raised concerns that it took too long to 

complete a transaction, especially for Full restructurings.12 The explanation is that, in 

12 See "HUD to Streamline MF Restructuring" in National Mortgage News, July 17, 2000. Multifamily 

Housing: Issues Related to M2M Program Reauthorization, GAO report to Congressional Committees, July 

2001. 

70 
Evaluation of Mark-to-Market Program

processing time that are often mentioned by industry groups include the extensive 

requirements contained in the program’s operating procedures guide, OMHAR’s detailed 

view process for the restructuring plans PAEs have submitted, and the lengthy negotiations 

the

2M restructuring outcome more attractive to 

e owners and, therefore, speeded up the acceptance and execution of the restructuring plan.

rsonnel

inted in May 2002.

hese changes were intended to lead to more efficient operation of the OMHAR staff. 

a total of

,385 M2M transactions that were completed through early August 2003 with information on 

critical tracking dates from OMHAR’s MIS. This pool of properties includes 391 closed Lite 

restructurings, 98 completed Lite Watch List projects, 520 Full restructurings that were 

closed at market rent, 200 projects that were closed at exception rent, and 176 completed Full 

Watch List projects.15 Projects that were determined by OMHAR to be ineligible for M2M or 

 

re

between OMHAR and some of the public PAEs during the early stage of program

implementation.13

In response to these bottlenecks, OMHAR made several policy changes that aimed to 

increase the program’s efficiency, participation, and output. One important change was

implementation of an Owner Incentive Package in the fall of 2000. The incentive package 

allows owners to receive monthly Capital Recovery Payments (CRP), designed to provide a 

reasonable return on the investment the owners must make to cover 20 percent of the 

rehabilitation and transaction costs. The incentive package allows owners to receive an 

Incentive Performance Fee (IPF) of up to 3 percent of effective gross income if the owner 

demonstrates sound management practices. It also allows owners to finance 100 percent of 

the initial deposit to a property's replacement reserve and 80 percent of certain reasonable 

transaction costs.14 CRP and IPF made the M

th

Our “process analysis” interviews with many of the stakeholders reinforced this conclusion. 

Two more recent policy changes may have also affected processing time. One is the change

in the M2M underwriting standard related to the “expense cushion” introduced in March 

2002. A more rigorous standard makes the program more attractive to the owners because

they feel more confident about their properties’ long-term financial viability. This may speed 

up the acceptance and execution of the restructuring plan by the owners. Also, key pe

and organizational changes were made at OMHAR by the Director appo

T

Methodology

To address the efficiency questions, this chapter examines the processing time of

1

13 As pointed out in the 2001 GAO report, during the time-consuming process of OMHAR’s contract

negotiations with some public PAEs, a significant number of properties entered into program. Consequently, 

OMHAR had a large volume of properties to assign to the PAEs at one time, which resulted in processing 

delays and the need for Section 8 contract extensions at above market rents for a large number of the properties. 14 For details, see Chapter Three of the Mark-to-Market Program Operating Procedures Guide, which can be 

downloaded from the OMHAR web site. 15 A Lite transaction is considered completed when OMHAR approved PAE’s Lite recommendation and 

justification (Form 10.2). For a Full transaction, the loan closing date is the completion date. A Watch List 

property is considered completed when its rent is marked down to the market level and OMHAR officially 

informs the owner that OMHAR is placing the property on the Office of Housing’s Watch List. The difference 

between Lite and Full Watch List is entirely based on the owner’s initial selection of restructure type when a 

71 
Evaluation of Mark-to-Market Program

that have discontinued the restructuring process for other reasons were not included in this 

To study the change in efficiency ove f OMHAR’s history, we sor

transactions into ach came into the O

g pipe e. This al ws us e whether p ojects that ntered th pipelin after the

nificant UD/OMH R hanges on average, processed faster than those 

ier era The left-h d-side p el .1 shows h w these opertie re

d a in ent h d q highli the that

pleted to date entered the pipeline early on, mo

alend ear 1999 d first h of year 2 . Full tran ction the oth hand,

ent e pipelin the late ears. Am ket and

re 98 enter uring 2 , compar to 63 tha tered ng 199 nd 269

red g 2002. decrea number of complete ansa s durin he late

002 a 2003 refle that p cts that e ed the pi ine d this pe d hav

ompleted the restructuring process. 

he number of projects still active as of the summe of 2003 is own in e right- nd-side

Tabl 1. There a very fe ctive Lite owever re ar ubstant numb

Fulls, pecially f the mo ecent coh . This sa le tru on rep ents a

ethodological challenge for our processing time analy . For ites an the old

Fu we are ab o obse the comp n time f he va ajority of these 

, trunca g only a f with e emely long processing time. For the recent cohorts of 

pecial those that tered th rogram since the 1st quarter of 2002), we are 

g many projects, especially those with longer processing time.

catio s that ou alysis w show a d ward-bi d pro ng time r th

horts Fulls. To ple truncation problem, we focus our analysis on 

ian pro ssing time. This, however, does not eliminate e bias e irely. T refo

ould scount ou rocessin ime estim for the co rts of ls tha tered

c 2. Samp runcat or the L s slight can ored.

analysis. 

r the course o t completed 

“entering cohorts” based on the time that e MHAR

processin

most sig

lin lo to se

policy c

an

ering co

r e e e

H A are,

of Table 5

ort year an

in the earl

distribute

. an o pr s a

ccord g to their uarter. It ghts fact the

vast majority of the Lite transactions com stly

during c ar y an alf 000 sa s, on er

tended to

xception

e

nts,

r th e

ed

in r y ong those Fulls closed at both m

ed

ar

e 2 d 001 t en duri 9 a

that ente durin The sing d tr ction g t r

part of 2 nd cts roje nter pel uring rio e

not yet c

T r sh th ha

panel of e 5. re w a s. H , the e a s ial er

of active es or re r orts mp ncati

t

res

major m sis he L d er

cohorts of lls, le t rve letio or t st m

projects tin ew xtr

Fulls (es ly en e p

truncatin

The impli n i r an ill own ase cessi fo e

recent co of mitigate this sam

the med ce th nt he re,

readers sh di r p g t ate ho Ful t en the

pipeline sin e 200 le t ion f ites i and be ign

 

property enters the M2M pipeline. Regardless of the owner’s initial selection, OMHAR has determined that a 

mortgage restructure is required for these properties but they failed to complete the restructure process. 

72 
Evaluation of Mark-to-Market Program

Table 5.1 

Distribution of Completed and Active M2M Transactions by Entering Cohort

(as of August 1, 2003)

 

Completed M2M Transactions

Active M2M 

Transactions 

Entering 

Cohort 

(Calendar 

Year and

Quarter) Lite

Lite

Watchlist 

Full 

Closed

at 

Market 

Rent 

Full 

Closed at 

Exception

Rent 

Full 

Watchlist All Lite Full

1999 Q2 0 0 1 0 0 1 0 0 

1999 Q3 83 15 30 19 9 156 0 2 

1999 Q4 72 6 9 4 7 98 0 0

1999 Total 155 21 40 23 16 255 0 2

 

2000 Q1 101 30 62 23 28 244 0 0 

2000 Q2 52 5 58 16 21 152 0 2 

2000 Q3 29 2 41 10 14 96 0 2 

2000 Q4 10 4 51 8 8 81 0 0 

2000 Total 192 41 212 57 71 573 0 4 

 

2001 Q1 15 6 63 14 14 112 0 9 

2001 Q2 9 5 72 30 17 133 0 15 

2001 Q3 8 3 57 25 19 112 0 20 

2001 Q4 1 3 24 13 13 54 0 9 

2001 Total 33 17 216 82 63 411 0 53 

 

2002 Q1 1 7 21 17 12 58 0 40 

2002 Q2 1 4 13 9 8 35 0 39 

2002 Q3 1 3 9 10 4 27 0 45 

2002 Q4 5 1 6 2 2 16 0 67 

2002 Total 8 15 49 38 26 136 0 191 

 

2003 Q1 3 2 3 0 0 8 2 139 

2003 Q2 0 2 0 0 0 2 8 128 

2003 Total 3 4 3 0 0 10 10 267 

 

Grand Total 391 98 520 200 176 1,385 10 767 

For the purpose of this analysis, we define performance efficiency as the time duration (days 

elapsed) between the date that a PAE accepts the asset assignment from OMHAR and the 

completion date. A major milestone in this process is the date when the restructuring plan is 

completed by the PAE and submitted to OMHAR for approval. Thus, in addition to 

examining the total processing time, we also partition the completion time into two parts—

uration from assignment acceptance to plan submission and duration from plan submission 

a

ing

plan to OMHAR was 164 days for Lites and 312 days for Fulls. As for the time OMHAR 

spent reviewing the plans once they were submitted by PAEs, on average it took 35 days for 

Lites and 120 days for Fulls. GAO’s analysis, however, did not examine how processing time 

d

to completion. 

A study conducted by the GAO indicates that, as of June 15, 2001, PAEs spent an average of 

199 days to complete a Lite restructure, while it took an average of 432 days to complete

Full restructure. The average processing time for a PAE to submit a mortgage restructur

73 
Evaluation of Mark-to-Market Program

varies across PAE type, nor did it investigate whether the program’s efficiency has improved

after OMHAR implemented measures to address the various bottlenecks.16

Total Completion Time 

Figure 5.1 presents, by entering cohort, our analysis of the trend of median completion time 

for the Lite restructurings. Analysis is performed separately for the regular Lites and Lite 

Watch List transactions. Overall, it clearly shows that completion time has been reduced 

substantially over time. This is true for both regular Lites and Watch List Lites. For example,

the median completion time is 245 days for the completed Lites that entered the program

during the fourth quarter of 1999, while transactions that entered the pipeline since the first

quarter of 2001 had median completion times between 110 and 176 days. The median 

completion time across all cohorts is 171 days. 

Figure 5.1

Median Completion Time (Number of Days)—Lite Restructuring 

0

20

40

60

80

100

120

140

160

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1 Q2

Entering Cohort

180

200

220

240

260

280

300

2003

Lite Restructuring

Lite Restructuring WatchList

The trend of processing time for the Watch List Lites follows a similar pattern, with median 

completion time across all cohorts of 157 days. While in general Watch List Lites require 

fewer days to complete than regular Lites, the median processing time jumped noticeably for 

projects that entered the pipeline during the first six months of 2002. However, median 

processing time came down again for transactions in the subsequent cohorts. While the 

 

16 Multifamily Housing: Issues Related to M2M Program Reauthorization. GAO report to Congressional

Committees, July 2001. 

74 
Evaluation of Mark-to-Market Program

reason for this spike in processing time is unknown, it is most likely related to some special 

e

HUD/OMHAR policies. 

nalyses for Full restructurings are presented in Figure 5.2 for those properties that closed at

market rent, exception rent, and as Watch List. Regardless of the restructuring outcome, the 

median completion ti sed at market rent, 

e median completion time is 399 days across all cohorts. The duration has been reduced 

the

s that

ve, and we thus are not able to observe their

ompletion time. 

ple, 

e across all cohorts is 456 days, those that entered the pipeline 

quarter of 2002 have a median completion time within 400 days. In 

completed as a Watch List does not involve a closing process, which would in general add 

another 60 days of processing time and put them on the same timeline as the other Fulls. 

processing circumstances of those few transactions rather than a change in th

A

me has been reduced dramatically. For Fulls that clo

th

from 550+ days for the earlier cohorts to generally within 400 days for cohorts since the later

part of 2000. This gain in efficiency coincides perfectly with the introduction of the owner’s 

incentive package to the M2M process during the fall of 2000. Although completion time 

drops even further for cohorts since the third quarter of 2002, this is most likely due to

sample truncation problem mentioned earlier in this chapter—i.e., many of the project

require a long processing time are still acti

c

Taken at face value, this recent reduction in processing time may be attributable to changes 

brought about by OMHAR’s current director, appointed in May of 2002, who has improved 

OMHAR’s relationship with other parts of HUD. He has also implemented a number of 

personnel and organizational changes within OMHAR. These changes include, for exam

the creation of a Production Manager position, increased oversight of the production process, 

and weekly (Monday) training conference calls. It is tempting to infer that these changes

have made OMHAR’s operation more efficient and effective, but we again caution the reader 

that our analysis for these most recent cohorts of Fulls is based on a small and truncated

sample of completed transactions. 

The completion times for Fulls closed at exception rent follow a similar trend. As expected,

Figure 5.2 shows that they tend to involve a longer time to complete relative to regular Fulls,

because exception rent transactions generally have more difficult issues to resolve. For 

example, exception rent properties tend to have lower REAC inspection scores, lower REAC

financial performance scores, higher vacancy rates, and be in worse neighborhoods. While 

the median completion tim

since the first

comparison, Fulls that are closed as Watch List require the shortest completion time among 

these three types of restructuring outcomes. The median completion time for such 

transactions is 356 days across all entering cohorts. This is because a Full transaction 

75 
Evaluation of Mark-to-Market Program

Figure 5.2 

Median Completion Time (Number of Days)—Full Restructuring 

0

50

100

150

200

250

300

350

400

450

500

550

600

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

Entering Cohort

Full Restructuring Closed at Market Rent

Full Restructuring Closed at Exception Rent

Full Restructuring Closed as WatchList

Processing Time by Major Milestone 

For Full restructurings, the completion of the restructure plan by the PAE and its submission 

to OHMAR for approval is a major milestone. It signifies that the PAE has completed all the 

due diligence and underwriting processes. The corresponding milestone for a Lite 

restructuring is the submission of OMHAR Form 10.2—PAE’s Justification for Lite 

Recommendation. For the purpose of this analysis, we label this key milestone “plan 

submission” for both restructuring types. 

Figure 5.3 plots the duration between assignment acceptance date and plan submission date 

for the Lites by entering cohort, separately for regular Lites and Watch List Lites. For regular 

Lites, the median duration is 142 days across all cohorts. The corresponding duration for all 

Watch List Lites is 114 days. Clearly, this processing phase accounts for the vast majority of 

the total completion time. The trend across cohorts is very similar to the trend for total 

completion time we discussed in the previous section. The duration has shortened remarkably 

over the course of OMHAR’s history, especially for regular Lites. 

The median processing time required to bring a Lite from the plan submission stage to 

completion is depicted in Figure 5.4. The median duration is 19 days for regular Lites and 26 

days for Watch List Lites (all cohorts combined). This processing phase accounts for only a 

small portion (less than a quarter on average) of the total completion time. For both 

76 
Evaluation of Mark-to-Market Program

transaction types, this duration fluctuates widely across cohorts. For regular Lites, it climbs 

er time, more attention of the OMHAR/PAE staff is being shifted to 

the Full transactions. 

igure 5.3

nd

steadily over time, while there are no discernible patterns for the Watch List Lites. This may

reflect the fact that, ov

F

Median Number of Days Elapsed Between PAE Acceptance of Assignment a

Plan Submission—Lite Restructuring 

0

20

40

180

200

220

Lite Restructuring

Lite Restructuring WatchList

120

140

60

80

100

160

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

Entering Cohort

77 
Evaluation of Mark-to-Market Program

Figure 5.4 

Median Number of Days Elapsed Between Plan Submission and Completion—

Lite Restructuring 

0

20

40

60

80

100

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

Entering Cohort

Lite Restructuring

Lite Restructuring WatchList

Similar analysis has been performed for Full restructurings. Figure 5.5 shows the median 

days elapsed between assignment acceptance and plan submission for the three types of Full 

restructurings. The median duration across all cohorts is 219 days, 261 days, and 264 days 

for Fulls closed at market rent, Fulls closed at exception rent, and Watch List Fulls, 

respectively. Once again, we observe a marked decline in the processing time across cohorts 

for all three outcome types, with reductions amounting to almost 50 percent. In general, Fulls 

closed at exception rent require a longer time to complete this phase of the processing. 

The median number of days required to complete a Full restructuring starting from the plan 

submission stage is presented in Figure 5.6. The duration oscillates widely, and there are no 

discernible patterns over time for all three of the restructuring outcomes. 

This analysis shows that, for both Lite and Full restructurings, most of the efficiency gain 

over the course of OMHAR’s history is attributable to the shortening of processing time 

between the PAE’s acceptance of assignment and plan submission. 

78 
Evaluation of Mark-to-Market Program

Figure 5.5 

Median Number of Da of Assignment and

estructuring Plan Submission—Full Restructuring 

ys Elapsed Between PAE Acceptance

R

0

400

450

500

550

Full Restructuring Closed at Market Rent

Full Restructuring Closed at Exception Rent

Full Restructuring Closed as WatchList

50

100

350

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

Entering Cohort

150

200

250

300

Figure 5.6 

Median Number of Days Elapsed Between Plan Submission and Completion: 

Full Restructuring 

0

1999

Q2

1999

Q3

1999

Q

2000 2000 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 2003 200

50

100

150

200

250

300

4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

3

Q2

Entering Cohort

Full Restructuring Closed

at Market Rent

Full Restructuring Closed

at Exception Rent

Full Restructuring Closed

as WatchList

79 
Evaluation of Mark-to-Market Program

Processing Time by PAE Type 

The remaining portion of this chapter examines the issue of relative efficiency between 

ublic and private PAEs. It is important to stress that, especially for the recent cohorts of 

d entering

shows that, over time, both types of PAEs have 

p

transactions, many of the public PAEs subcontracted much of the processing work to private 

PAEs. We focus our analysis on the total completion time (that is, days elapsed between 

assignment acceptance and completion), stratified by restructuring outcome type an

cohort (calendar year). 

Figure 5.7 compares the median completion time for regular Lite transactions processed by 

public and private PAEs. The median completion time for all cohorts combined is 161 days

for the private PAEs and 203 days for the public PAEs, implying that the private PAEs tend 

to be more efficient overall. The figure also

become more efficient. For projects that entered the pipeline during 2001 and 2002, public 

PAEs require slightly fewer days to complete the transactions. 

Figure 5.7 

Median Completion Time (Number of Days) by PAE Type—Lite Restructuring

0

50

100

150

200

250

300

1999 2000 2001 2002 2003

Entering Cohort (Calendar Year)

Public PAE

Private PAE

Analysis for Lites closed at watchlist is presented in Figure 5.8. For all cohorts combined, 

private PAEs have a shorter completion time for such restructuring (134 days vs. 196 days). 

For the recent cohorts, however, the median processing time is almost identical across the 

two PAE types. 

80 
Evaluation of Mark-to-Market Program

Figure 5.8 

Median Completion Time (Number of Days) by PAE Type—Lite Restructuring 

Watch List 

0

50

100

150

200

250

300

1999 2000 2001 2002 2003

Entering Cohort (Calendar Year)

Public PAE

Private PAE

Similar comparisons for the Full restructurings are shown in the subsequent three figures.

Analysis for the Fulls closed at market rent is presented in Figure 5.9. The median 

e for all cohorts combined is 387 days for the private PAEs and 458 days for 

ore recent cohorts is extremely close between the two types of PAE. This most 

likely reflects the fact that, for the recent cohorts of transactions, many of the public PAEs 

subcontracted much of the work to private PAEs. Both types of PAEs appear to have become

more efficient in terms of completion time. 

Figure 5.10 shows the median completion time for Fulls closed at exception rent. For all 

cohorts combined, public PAEs (435 days) appear to hold a slight edge relative to the private 

PAEs (459 days) in terms of median completion time. The figure indicates that for the 1999, 

2000, and 2001 cohorts of transactions, the public PAEs required fewer days to complete 

such restructurings. The reason for this processing time differential is unknown. It is worth 

pointing out that the number of exception rent transactions processed by the public PAEs 

each year was substantially smaller relative to the volume assigned to the private PAEs. It is 

likely that the public PAEs were able to dedicate more staff time to those transactions. 

Analysis for the Fulls closed as Watch List is presented in Figure 5.11. The median 

completion time for all cohorts combined is 346 days for the private PAEs and 402 days for 

the public PAEs. 

completion tim

the public PAEs. While the private PAEs appear to be more efficient overall, completion 

time for the m

81 
Evaluation of Mark-to-Market Program

Figure 5.9 

Median Completion Time (Number of Days) by PAE Type—Full Restructuring 

Closed at Market Rent 

0

100

200

300

400

500

600

700

1999 2000 2001 2002 2003

Entering Cohort (Calendar Year)

Public PAE

Private PAE

Figure 5.10 

Median Completion Time (Number of Days) by PAE Type—Full Restructuring 

Closed at Exception Rent 

0

100

200

300

400

500

600

700

1999 2000 2001 2002

Entering Cohort (Calendar Year)

Public PAE

Private PAE

82 
Evaluation of Mark-to-Market Program

Figure 5.11 

Median Completi estructuring

Watch List 

on Time (Number of Days) by PAE Type—Full R

0

1999 2000 2001

1

2

700

2002

Entering Cohort (Calendar Year)

Public PAE

Private PAE

400

500

600

300

00

00

As

restructurings. Because of the extra processing step involved, Fulls closed at exception rents 

nd to require the longest processing time. Processing time for all restructurings has been 

maj

assi of the processing time 

as declined markedly across the cohorts of transactions we examined. There appear to be no 

Bot

the s

require a slightly shorter time period for completion. 

Conclusion 

expected, we found that Full restructurings generally take more time to process than Lite 

te

shortened over the course of OMHAR’s history. Regardless of the restructuring types, the 

ority of the processing time is spent between the PAE’s acceptance of the asset 

gnment and the submission of the restructuring plan. This portion

h

discernable trends for the duration between plan submission and final closing. 

h public and private PAEs have become more efficient in terms of processing time over 

course of OMHAR’s history. For almost all of the restructuring types, private PAE

83 
Evaluation of Mark-to-Market Program

6. Analysis of Program Outcomes 

ter examines the housing outcomes of the Mark-to-Market program in terms of the 

oal of preservation of the affordable housing stock. One measure of program outcome is the 

Does the Mark-to-Market process assure that the properties remain financially and 

How do Lite restructurings and Full restructurings differ in terms of financial and 

physical viability? 

PAEs to

ry

ical

tion scores, the initial deposit to replacement reserves, and the rehab escrow 

amounts that are required as part of the restructuring agreement. 

e postIntroduction 

This chap

g

location of properties that received treatment—that is, whether the program is preserving 

affordable rental stock located in high-cost, low vacancy, tight housing markets where 

vouchers may be difficult to use. Location results are presented in Chapter Three 

(Participation in the Mark-to-Market Program) of this report. 

The Statement of Work raises some other outcome-related questions: 

•

physically viable as affordable rental projects?

•

• Do Lites and Fulls differ in terms of post-restructuring performance?

To address these research questions, this chapter proceeds as follows: 

• We first examine the underwriting standards developed by OMHAR and used by

process the Lite and Full transactions. Comparisons are made between the M2M 

underwriting guidelines and those used to originate multifamily mortgages in the 

conventional market and for loans of other FHA programs. The objective is to assess 

whether the M2M guidelines are adequate and appropriate when compared to the indust

standards. 

 

• Physical viability of the M2M properties will be measured largely by the REAC phys

inspec

• Additional analysis focuses on the financial performance of a cohort of the M2M 

properties that have undergone restructuring, comparing their pre- and post-restructuring 

operating outcomes. Because of the limited amount of financial data available in th

restructuring period, we can provide only a snapshot estimate of these properties’ 

performance. 

• The last section provides a summary of the findings of this chapter. 

 

84 
Evaluation of Mark-to-Market Program

Analysis of the M2M Underwriting Standards 

An important feature of the M2M program is underwriting. In order to help ensure that 

properties remain viable over the long term, program underwriting needs to be rigorous and 

detailed. In the following section we highlight key features of the M2M underwriting

process.

he PAE plays the lead role in underwriting both Full and Lite transactions. The OMHARh

iew.

Gross Revenue and Income 

n important component of underwriting is determining Net Operating Income (NOI), which 

ss

e the physical and financial viability of a project.

or purposes of calculating NOI the PAE must use the lower of market rents or affordable 

s process

ncy and bad

ebt/collection losses that may occur in both the residential space and the commercial space 

(if any). A similar adjustment is also typical for underwriting FHA and conventional loans. 

For an M2M property, the adjustment is determined by examining the historical vacancy and 

debt experience of the project and the relevant market information to derive separate vacancy 

 

T

developed underwriting model is used to assemble and analyze data needed to process eac

Full transaction. Once the PAE has completed underwriting and the results have been 

incorporated into a recommendation for a Lite or a restructuring plan for a Full, the 

recommendation or plan is submitted to OMHAR for a quality control underwriting rev

Both the PAEs and OMHAR have engaged numerous professionals who are highly 

experienced in real estate underwriting and finance. 

Below we describe the key components of the M2M underwriting for a Full restructuring, 

followed by a brief description of how underwriting proceeds for a Lite transaction. 

A

is the net revenue that could be generated from the property. This estimation includes 

calculating the gross potential rent from all rental units in the property plus income derived 

from other sources such as from commercial space, parking, laundry facilities, etc. The gro

potential rent is calculated in two ways based on: a) comparable market rents and b) 

affordable rents that are required by statute to be used in the Low Income Housing Tax 

Credit program. Where the need is justified, the PAE may use Section 8 exception rents that 

exceed the market rents, in order to ensur

F

rents, ensuring that the more conservative estimate is used so that the property can remain 

viable with affordable rents even in the event the Section 8 subsidy becomes unavailable. 

Regular FHA and conventional multifamily underwriting use market rent in calculating 

income. 

The PAE uses a limited scope appraisal and its own site visit as the primary source for 

estimating comparable rents. For areas where comparable rents are few (such as remote rural

areas), the appraiser’s and PAE’s professional judgment are especially needed.17 Thi

is no different than if a non-M2M property were being underwritten in the same area. 

Once gross income has been calculated, a downward adjustment is made for vaca

d

17 For areas where no comparable rents can be found, the M2M legislation has suggested that the PAE should 

use 90% of the Fair-Market-Rent (FMR) as the benchmark. 

85 
Evaluation of Mark-to-Market Program

rate and bad d um

ssumptions for each factor, assuring a m

l as the

tual

perating data, industry standards, and owners’ data, as well as information from utility 

mediate repair/rehabilitation, discussed below under Rehabilitation Escrow.) OMHAR 

requires a year-by-year breakdown of these items for the proposed mortgage term plus two 

years, a practice generally not required for regular FHA loans or for conventional market 

loans. The OMHAR requirement is a more detailed, longer-term assessment than is typically 

performed by the conventional market. 

The study team heard from various stakeholders and other participants that this aspect of the 

M2M program was one of the major successes of the program. In many cases, an adequate 

reserve for replacement account for these properties is being fully funded for the first time. 

The detailed Physical Condition Assessment (PCA) performed by professional assessors, as 

well as comments from residents and reviews and adjustments by PAEs, help to give a good 

icture of the current physical condition of the property and provide the basis for scheduled 

replacement of key components. The underwriting model then helps to frame the cash flow 

impact of these costs over time and establish the proper funding for these expenses. 

Moreover, the PAE underwriter is required to incorporate an annual increase in the amount 

of deposits to the reserve account by an Operating Cost Adjustment Factor (OCAF), to assure 

ll funding of this account and incorporate any impact on costs from inflation. 

ebt/collection factors. In addition, OMHAR requires certain minim

a ore conservative assumption than if historical 

experience suggests lower rates. For residential vacancies, the PAE must assume at least 5 

percent, while for bad debt/collection the minimum assumption is 2 percent. Underwriting of

conventional market or other FHA loans uses assumptions that are similar to these. 

Operating Expenses 

A second underwriting component required for determining NOI is a project’s operating 

expenses. These expenses include such items as utilities, management fees, insurance, repair 

and maintenance (separate from the reserve for replacement, discussed below), as wel

capital recovery payment, which is an allowance given to an owner as an incentive to 

participate in a Full M2M restructuring (see below). The data sources used to determine 

operating expenses include the limited scope appraisal, the previous three years of ac

o

companies, insurance agents, taxing bodies, contractors, and input from HUD field office 

staff. The guidance provided by OMHAR to the PAEs on each of these items is generally 

consistent with that for conventional loans and regular FHA loans. 

Reserve for Replacement 

A third component of underwriting under the M2M program is the timing and estimated cost 

of replacing significant items in restructured properties. (This does not include estimates for 

im

p

fu

86 
Evaluation of Mark-to-Market Program

Net Operating Income (NOI) and First Mortgage 

For most rental properties the standard definition of Net Operating Income is rental revenue 

s, and

subtracted from revenue, 

hich is the capital recovery payment to the owner. The rental revenue minus these expenses 

property. Once adjusted NOI is established, the PAE will

dete ortgage can be serviced and still leave adequate cushion (see 

below). Ideally, the first mortgage would cover the cost of the required rehabilitation (minus 

e owner’s 20 percent contribution) plus the transaction costs (minus the owner’s 20 percent 

repair/rehab and transaction costs,

ection 8 exception rents are provided, if justified by a need for affordable housing.

expenses or reduction in rental income would cause the project to fail financially. 

o provide that margin of safety, lenders will require an appropriate DSCR in underwriting. 

nal

ping

e

ans are very small relative to the size of the project, a unique characteristic of the M2M 

For this reason, in early 2002, OMHAR required an approach where all transactions, 

regardless of the DSCR, must have an NOI that provides a cushion of 7 percent to 10 percent 

of their total expenses, over and above the amount needed to service the new first mortgage 

debt. In some cases, this may result in a DSCR of 3.0 or 4.0. 

Return to Owner 

Prior to 2000, OMHAR closed very few M2M Full restructurings. After a series of 

stakeholder meetings in the summer of 2000, two additional financial incentives were added 

to the surplus cash payment in order to induce owners to complete a Full restructure through 

successful closing. These payments were created to secure owner participation in M2M by 

minus standard operating expenses, allowing for contingency factors such as vacancie

capital maintenance requirements. In M2M another expense is

w

results in the adjusted NOI for a

rmine how much, if any, m

th

contribution), plus the amount of outstanding mortgage. However, this rarely occurs. 

Therefore, OMHAR normally pays down the outstanding mortgage—to zero, if necessary. If 

the NOI cannot support the mortgage necessary to cover

S

The starting point for determining the amount of the first mortgage that can be supported is 

the NOI calculated for the property. In a conventional and regular FHA multifamily property, 

the NOI is divided by a factor, the Debt Service Coverage Ratio (DSCR), to derive the 

amount of debt service that can be supported by the property. The higher the ratio, the more 

conservative the assumption about how much debt can be supported by property revenue. A 

prudent underwriter will generally not structure a deal so tightly that a minor, unexpected 

increase in

T

At the inception of the M2M program, based on underwriting practice in the conventio

market, OMHAR suggested a DSCR of 1.2 to 1.4 as providing an appropriate level of safety 

margin for M2M transactions. In other words, all transactions had NOI that was 20 to 40 

percent greater than the debt service on their new first mortgages. However, after develo

experience with the program, it was felt that this margin might not be adequate. Many of th

lo

program. Consequently, the dollar amount needed to service that small debt is also very low.

An overage of 20 to 40 percent of this small amount is, in turn, a small amount. OMHAR

underwriters recognized this fact and deemed this amount to be inadequate to provide a 

cushion for unexpected rises in expenses or vacancies in a project of any size. 

87 
Evaluation of Mark-to-Market Program

providing a fair return on new money invested in the property. Payments are made in such a 

ay as to assure efficient operation of the property after restructuring.

he current underwriting of M2M properties now includes three possible incentives,

Incentive performance fee. 

n for completing a 

e to owners to maintain 

and transaction costs.

ents found in the market, 

hich has recently been about The CRP is included as an

expense for underwriting and is incorporated into the calculation of adjusted NOI. Assuming 

covery payment, the IPF will not be paid, nor will it accrue for payment at a future date. 

surplus cash is available after payment of all operating expenses, debt service on the first 

d

6.1.

 

w

T

collectively known as the Owners Incentive Package (OIP): 

• Capital recovery payment. 

•

• Share of surplus cash.18

With the creation of this package, owners were given a financial reaso

successful restructuring, while at the same time providing an incentiv

the properties in good physical and financial condition.

The capital recovery payment (CRP) is a payment that provides the owner with a rate of 

return on new money invested in the property for repair/rehabilitation

The rate of return would be equivalent to rate for alternative investm

w 7 percent on an annualized basis.

that certain terms and conditions are met and that funds are available, the CRP will be paid to 

the owner. If no funds are available, payment accrues until a later date when surplus cash is 

available. 

The incentive performance fee (IPF) provides an incentive to the owner to operate the 

property efficiently and minimize operating expenses. Unlike the CRP, the IPF is not 

included as an expense and does not reduce the NOI used in underwriting. As with the CRP, 

certain terms and conditions must be met before the IPF is paid. However, if no funds are 

available after payment of expenses, debt service on the first mortgage, and any capital 

re

If

mortgage, and the CRP and IPF payments, the owner will receive up to 25 percent of the 

remaining amount. The remainder of the surplus cash is paid toward the M2M second an

third mortgages (if any). An example of this underwriting calculation appears in Table

18 The “share of surplus cash” incentive existed before the introduction of the Owners Incentive Package. 

88 
Evaluation of Mark-to-Market Program

Table 6.1: Calculating Adjusted NOI and Surplus Cash Flow 

 Gross Potential Rent @ Market $1,020,000

 - vacancy loss and bad debt (@ 7%) - 71,400

 - operating expenses - 720,000

 - capital recovery pmt to owner - 10,000

 - replacement reserves - 75,000

 Adjusted NOI $ 143,600

 - 1st mortgage debt service - 106,000 

 - incentive performance fee to owner - 28,500

 Surplus Cash Flow $ 9,100

- 75% to second mortgage - 6,825

- 25% to owner - 2,275

Rehabilitation Escrow 

The immediate rehabilitation requirements are identified in the PCA and adjusted by the P

as needed.

AE

ld be

airs to

purpose of restoring the project to a non-luxury standard adequate for the 

ents to the owners, and the 

 is more than 

o

nt,

19 Tenant-identified needs play a major role in determining the items that shou

included in the rehabilitation escrow. The M2M legislation limits the scope of the rep

those “for the

rental market intended at the original approval of the project-based assistance.” These may

include the replacement of roofs and windows, installation of fire-resistant doors and security

lighting. However, the program is not designed to handle repairs/rehabilitation beyond a 

reasonable limit – about $10,000 per unit, according to one of OMHAR financial advisors. 

Partial (or full) Payment of Claim 

The calculation of the partial payment claim is unique to the M2M process and without a 

parallel in the conventional market. The amount of the claim is based on the size of the 

existing and new first mortgages, the deposit to the reserve for replacement account, 

transaction costs, amount invested by the owner, incentive paym

rehabilitation escrow. 

In no case may the claim be more than the unpaid principal balance (UPB) of the insured first 

mortgage prior to restructuring. In virtually all restructurings, the partial claim

just the difference between the UPB on the existing first mortgage and the restructured first 

m rtgage supportable by the new restructured NOI. In most cases, the partial claim payment 

will also include amounts to cover the initial deposit to the reserve for replacement accou

and a portion of the immediate rehabilitation costs and transaction costs approved by the

PAE for the restructuring. 

 

19 Rehabilitation in this context does not include substantial rehabilitation as defined by FHA. 

89 
Evaluation of Mark-to-Market Program

Second and Third Mortgages 

claim, simultaneously underwriting the second and third 

ortgages (where applicable) is another unique element of the M2M program. These loans 

cond and third

ortgages, with the remaining 25 percent paid to the owner as part of his or her return. 

OMHAR has provided guidance to the underwriters on sizing second mortgages to determine 

an amount that can “reasonably expected to be repaid.” It is still too early to tell how these 

ans will perform, as only the first year of data is available at the time of this report and may 

not be typical of future performance. 

Underwriting Lite Transactions 

sting

s the rent and the immediate and ongoing repair needs in 

the same manner as in a Full transaction. However, the PAE will only consider whether the 

ed

is

at

alysis. For example, the underwriting model is not 

icant differences include:

Lites receive a less detailed market rent study, rather than the detailed appraisal required 

for a Full restructuring. 

• No adjustments to NOI are made for Capital Recovery Payments because the owner 

makes no financial contribution. 

• There is no partial claim payment. 

• There is no second or third mortgage. 

• The mortgage may be refinanced under a Tier II Lite, but the UPB stays the same. 

• There is no “cushion” built into the expenses. 

As with the partial payment of

m

attempt to recapture at least a portion of the amount of the claim paid as part of the 

restructuring. Payment on these loans is required only from cash available after the first 

mortgage payment and the Incentive Performance Fees are paid. If surplus cash is available,

a minimum of 75 percent of this amount is required for payment on the se

m

lo

The previous discussion has focused on OMHAR’s guidance for underwriting a Full 

restructuring. In some cases, however, properties may qualify for contract renewal as a Lite 

transaction. A Lite transaction involves marking down rents only and does not involve a 

restructure of the existing mortgage. Rarely, a Lite may include refinancing the exi

mortgage to achieve a reduced interest rate, but no partial claim is paid as part of the 

transaction. 

OMHAR has established two forms of Lite transactions – Tier I Lite and Tier II Lite. In a 

Lite transaction, the PAE determine

income at market rent level could cover the operating expenses reported in the latest Audit

Financial Statement and the determined repair needs. If the DSCR is 1.2 or greater, the 

property is processed as a Tier I Lite transaction. If the DSCR appears to be slightly lower 

than 1.2, the PAE would (1) conduct further analysis on the expenses and (2) consider 

whether a DSCR of 1.1 may be appropriate. Such transactions are called Tier II Lites. If it

determined that the property still does not appear to be viable, the PAE will recommend th

the property be processed as a Full restructure. 

Underwriting Lite transactions is easier and more streamlined than underwriting Full 

restructurings and involves less detailed an

required for a Lite transaction. Other signif

•

90 
Evaluation of Mark-to-Market Program

• The minimum vacancy and collection loss factor is 5 percent, as opposed to 7 percent for

Fulls. 

• There is no rehab escrow. 

Given the relatively strict tests for processing a property as a Lite and the owner incentive 

package available after the fall of 2000, very few Lite transactions continue to be processed. 

E rty renews as a Lite, ins eligible fo restructuring ture. 

This would trigger the more detailed and rigorous underwriting analysis. 

In conclusion, the rigorous underwriting of M2M transactions is at least as thorough as 

andard FHA or conventional multifamily underwriting and therefore one should expect the 

nderwriting to contribute to the long-term financial viability of the program. 

Analysis of the Required Rehab Escrows and Initial Deposit to 

rehab costs. The provision of funds for rehab needs should have a large impact on the future 

for Full restructuring

the table shows, for 477

Full transacti s that required r the av s $2,244 (with a

m n $1,10 ). Consistent with physic ows for that

closed with exception rents were higher than for properties that closed at market rent—an 

average of $2,729 per unit compared with $2,044 per unit (the median escrow for

exception rent deals was $2,045 per unit compared with $950 per unit for mark

t he large differentia n the average

m s implies that the distribution is skewed – the majority of transactions 

required a relatively low leve

oss all properties set aside for rehab escrows was over $114 million. 

ven if a prope it rema r a Full in the fu

st

u

Replacement Reserves 

One important feature of the M2M program that is likely to contribute to long-term viability 

of the properties is the program’s emphasis on physical needs. As part of the underwriting for

Full restructuring transactions, the property’s reserve for replacement is calculated so as to 

ensure funding for ongoing repairs for the next 20 years. The initial deposit to the 

replacement reserve is fully financed as part of the new mortgage. Immediate capital needs 

(first year) are also included in the transaction, and 80 percent of immediate needs are funded

through the program. Property owners pay for the remaining 20 percent of the immediate 

viability of restructured properties. 

Table 6.2 shows the amounts required for the rehabilitation escrows

transactions. (These data are presented graphically in Figure 6.2.) As

erage amount wa

al condit escr

on

3

ehab escrows

their e

per unit

edia wors ion, properties

amount

et rent

ransactions). T l betwee and median per-unit escrows for 

arket rent transaction

l of escrows.

The total acr

91 
Evaluation of Mark-to-Market Program

Table 6.2: Rehab Escrow Amounts Per Unit 

Closed at 

Market Rent 

Closed with 

Exception Rents All Fulls 

Min $9 $44 $9 

25th Percentile $404 $604 $466 

Mean $2,044 $2,729 $2,244 

Median $950 $2,054 $1,103 

75th Percentile $2,174 $3,991 $2,685 

Max $38,734 $12,207 $38,735 

Total across all units $86,264,426 $28,444,408 $114,708,834 

Number of Properties 338 139 477 

Figure 6.2 50 60 70

0 10 20 30 40

Number of Properties

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

Per-Unit Rehab Escrow Amount ($)

477 Full Restructurings that are required to set up Rehab Escrow

Distribution of Rehab Escrow Amount per Unit

In addition to the rehab escrows that address immediate capital needs, the underwriting for 

Full transactions also addresses the expected capital needs – through deposits to the 

replacement reserve – for the next 20 years in order to ensure property viability. In cases 

where substantial repairs or replacements are projected to happen in the first few years after

closing, funds are allocated as part of the M2M transaction for an initial deposit to the

replacement reserve. As can be seen in Table 6.3 (and graphically in Figure 6.3), the average 

as

,

t

initial deposit to the replacement reserve is $2,752 per unit, with a median of $2,206. As w

the case with escrow accounts, the initial deposits are higher for exception rent transactions

averaging $3,367 per unit with a median of $3,000. The average is $2,512 for market ren

transactions, with a median of $1,974. 

92 
Evaluation of Mark-to-Market Program

Across all units the initial deposits to the replacement reserves total over $164 million.20

Table 6.3: Initial Deposit to the Replacement Reserve per Unit 

Closed at 

Market Rent 

Closed with 

Exception Rents All Fulls 

Min $73 $25 $25

25th Percentile $1,014 $1,464 $1,125 

Mean $2,512 $3,367 $2,752

Median $1,974 $3,000 $2,206

75th Percentile $3,478 $5,033 $3,900

Max $22,769 $10,667 $22,769

Total Across All Units $110,833,573 $53,901,165 $164,734,738

Number of Properties 552 215 767 

Figure 6.3 

71

Distribution of Initial Deposit to Replacement Reserve per Unit

80 90 100 110 60 70 50 40 30 20 0 10

Number of Properties

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

Per-Unit IDRR Amount ($)

1 Full Restructurings Closed as of Early August 2003

In cases where critical repairs (life threatening repair needs) pertaining to health and f

azards are

ire

identified in the Physical Condition Assessment (PCA) document during the 

restructuring process, property owners are required to fix those problems before closing. 

After closing, owners are expected to draw funds from the rehab escrow and complete the 

other M2M-required repairs over the subsequent 12-month period. Taken together, these 

funds for the rehab escrow and the initial deposits to the replacement reserves represent a 

tangible benefit for tenants residing in these HUD-assisted properties. As a result of M2M, 

the tenants are able to live in units that are safer, of higher physical quality, and better 

maintained. 

 

h

20 Our estimate does not include prior balance in the replacement reserve. 

93 
Evaluation of Mark-to-Market Program

Comparisons of Pre- and Post-Restructuring Property Performance 

The remaining portion of this chapter compares the performance of a set of M2M properties 

in the pre- and post-restructuring periods using financial data from the Annual Financial 

Statements (AFS) assembled by HUD’s REAC (Real Estate Assessment Center). Physical 

inspection scores from REAC are used as a proxy to examine whether there are changes in 

e property’s physical condition after the restructuring.

losed Lites, 285 Fulls closed at market rents, 77 Fulls closed at exception rents, and 179 

,

tics.

Since we have only one to two years of financial data for the post-restructuring period, the 

comparison results may not predict these properties’ long-term performance. (For those 

closed during 2001, there is only one year of post-restructuring financial data.) This is 

especially the case for the Full restructuring properties, because the M2M closing 

requirements make their cash flow and surplus cash levels anomalous for the closing year. In 

particular, surplus cash is likely to be negative because the M2M rehab costs have been 

incurred, but the reimbursement from the M2M rehab escrow may not have occurred yet. 

Similarly, operating expenses right after closing may not be typical. Our analysis, 

nonetheless, provides a snapshot estimate of these properties’ performance before and after 

the restructuring. 

Table 6.4 presents a comparison of the operating characteristics of these M2M properties in 

the pre- and post-restructuring periods, stratified by restructuring outcome type. A concern in 

this analysis is that observed changes in these variables may be driven by factors that are 

external to the M2M program (such as local housing markets and neighborhood factors). 

The financial variables are: 

• Rental vacancy rate. 

• Administrative expenses. 

• Utilities expenses. 

• Operating and maintenance expenses. 

 

th

To ensure that there are sufficient AFS data in the pre- and post-restructuring periods for 

comparison, we focus our analysis exclusively on the M2M transactions completed during 

calendar years 2000 and 2001. This results in a total of 903 completed transactions: 362 

c

Watch List properties. For the year 2000 cohort of properties, data for the pre-restructuring 

period are based on the average of the 1998 and 1999 data, while an average of the 2001 and 

2002 data is used for the post-restructuring period.21 For the year 2001 cohort of properties

a simple 3-year average of the 1998-2000 data is used for the pre-restructuring period, while

data for the post-restructuring period are based on the 2002 data.22 For ease of comparison, 

all dollar amounts are converted to a per-unit-month basis and adjusted to the year 2002 

values using the Consumer Price Index published by the Bureau of Labor Statis

21 For cohorts with multiple years of performance data, we reported the average across years because it 

mitigates the year-to-year variations due to idiosyncratic factors. 22 The 2003 AFS data were not available when the evaluation team was preparing this report.

94 
Evaluation of Mark-to-Market Program 

95 

• Taxes and insurance expenses. 

• otal o t x

To reduce the impact of extreme values in the financial data, we report the median value of 

each variable for each of the restructuring outcome groups. The second panel of the table 

highlights, for each variable, the median percentage increase and decrease in the value and 

t oport ties whic s fi ra h i

decreased. 

The table shows that, across all four restructuring outcome groups, median total operating 

expenses have declined in the post-restructuring period. Fulls closed at exception rent tend to 

have higher total operating expenses relative to the other groups in both the pre- and postrestructuring periods. For example, in the po restructuring period, the median operating 

cost is $413 for the exception rent properties, com cl

m en 2 for the Lites, and $320 for the Watch List properties. Further examination 

of the sub-categories of the expenses suggests that this higher cost is largely due to higher 

operating and maintenance expenses. Another important observation is that the median 

expense levels associated with taxes and insurance have increased across the board in the 

post-restructuring period. Among those properties with increased operating and maintenance 

expenses, the m cre s p t 

p es. T e increases are most likely a ciated with the overall increases in insurance 

cost in the nation because of the events of September 11, 2001. 

Am to have the largest p ortion of properties 

in which total operating expenses had increased in the post-restructuring period—49 percent 

for the Fulls closed at market rent and 44 percent for the exception rent Fulls. The range of 

increase is 8 percent for Fulls closed at market rent and 6 percent for exception rent Fulls. 

Vacancy rate is another important indicator of a pr s e i b i p e a 

loss of potential rental income. As shown in the table, there appears to be a slight increase in 

the m

the W

changes is unknown. It is worth stressing that the vacancy rates of these developments are, to 

a large extent, driven by the dem a

factors that are external to the property’s m t y a n i 

T

and insurance). 

he pr

arket r

roperti

ong the four groups, Full restructurings appear

edian vacancy rate for Lites and exception rent properties, while the vacancy rate for 

atch List group as a whole has decreased after the restructuring. The reason for these 

perating expenses (administra ive + utilities + operating and maintenance + ta es 

ion of proper in h the peci c ope ting variable as ncreased or

stpared to $333 for the Fulls osed at 

t, $33

edian in ase range from 16 

sso

ercen to 21 percent across the four groups of 

hes

rop

eca

dit

ope

en

rty’

 and

 op

 ph

rat

sic

on, 

rkets and by neighborhood 

l co

use

on.

t re res nts

and and supply of the housing m

anagem
Table 6.4 Comparison of Pr t a ic L Full Restructurin u n a 1

e- and Post-Res

gs (903 Restruct

ructuring Operation Char

rings Closed during Cale

cterist

dar Ye

s of Completed

rs 2000 and 200

ite

)

Res

FULL RESTRUCTURING

MEDIAN PER-UNIT-MONTH

LITE

RESTRUCTURING

Closed at 

Market Rent 

Cl

Exce

ose

ptio

d 

n 

Pre-restructuring Vacancy Rate 1.5% 2.3% 4.4% Post-restructuring Vacancy Rate 2.0% 2.3% 5.0% Pre-restructuring Administrative Expenses $109 $105 $115 Post-restructuring Administrative Expenses $102 $101 $112 Pre-restructuring Utilities Expenses $58 $45 $78 Post-restructuring Utilities Expenses $61 $46 $76 Pre-restructuring Operating & Maintenance Expenses $123 $114 $162 Post-restructuring Operating & Maintenance Expenses $105 $111 $144 Pre-restructuring Taxes & Insurance Expenses $59 $59 $69 Post-restructuring Taxes & Insurance Expenses $60 $63 $70 Pre-restructuring Total Operating Expenses $362 $335 $437 Post-restructuring Total Operating Expenses $332 $333 $413 

Proportion of Properties in Which Vacancy Rate Increased 45% 51% 53% 

Median Percentage of Increases 100% 100% 80% 

Proportion of Properties in Which Vacancy Rate Decreased 37% 41% 42% 

Median Percentage of Decreases -54% -50% -42% 

Proportion of Properties in Which Administrative Expenses Increased 35% 35% 46% 

Median Percentage of Increases 7% 6% 8% 

Proportion of Properties in Which Administrative Expenses Decreased 65% 65% 54% 

Median Percentage of Decreases -10% -10% -11% 

Proportion of Properties in Which Utilities Expenses Increased 60% 55% 47% 

Median Percentage of Increases 12% 12% 11% 

Proportion of Properties in Which Utilities Expenses Decreased 40% 45% 53% 

Median Percentage of Decreases -7% -8% -10% 

Proportion of Properties in Which Operating & Maintenance Expenses Increased 32% 45% 36% 

Median Percentage of Increases 16% 19% 17% 

Proportion of Properties in Which Operating & Maintenance Expenses Decreased 68% 55% 64% 

Median Percentage of Decreases -19% -18% -16% 

Proportion of Properties in Which Taxes & Insurance Increased 60% 70% 71% 

Median Percentage of Increases 12% 13% 18% 

Proportion of Properties in Which Taxes & Insurance Decreased 40% 30% 29% 

Median Percentage of Decreases -11% -14% -16% 

Proportion of Properties in Which Total Operating Expenses Increased 36% 49% 44% 

Median Percentage of Increases 7% 8% 6% 

Proportion of Properties in Which Total Operating Expenses Decreased 64% 51% 56% 

Median Percentage of Decreases -10% -9% -9% 

Number of Properties 362 285 77 

 96 
Evaluation of Mark-to-Market Program 

Com

 97 

parisons based on additional perform

REAC overall physical inspection score (1-100). 

REAC overall financial perform

Ex

Debt Service coverage ratio. 

Qu

Surplus cash level. 

e use the REAC physical inspection score as a proxy for the property’s general physical 

nt have

oportio

ancial 

atch List properties appear to have the lowest m

ance score below 60 in the post-restructuring period. In addition, all four groups of 

edian ratio that is below 1 in both periods. This suggests that in general these properties 

ance indicators are shown in Table 6.5. 

The perform e : 

• 

• ance score (1-100). 

• pense-to-income ratio. 

• 

• ick ra

• 

W

condition. The table indicates that the score has increased for the majority of the properties 

since restructuring. Among the four restructuring outcome types, while Fulls closed at market 

re e hest pr re medi gro

pr 4 r f d

decrease is not alarming (12 percent). 

All other measures shown on the table are designed to capture the financial soundness of 

these properties’ operation. 

The REAC financial perform i o

fin ind tors. In e n

financially healthy. As can be seen from the table, the median score is above 60 across the 

board in the post-restructuring period. Lites have the highest median score in both the prerestructuring (80) and post-restructuring (75) periods relative to the other groups. In contrast, 

the W edian score among the four groups in 

both the pre-restructuring (70) and post-restru e observation 

is that about half of both Fulls closed at exception rents and Watch List properties had a 

perform

properties have experienced a decrease in the m ance score since restructuring. 

The expense-to-incom s are 

sufficient to cover expenses (excluding debt services). Ratios less than 1 suggest that 

expenses are less than incom

increased for all the restructuring outcom ept he Li , g 

m

have sufficient incom

anc indicators include

tio. 

 th

n (

 hig

7 

e-

 o

st

pro

ru

p

ct

er

ur

tie

ing

s 

an

ec

 s

re

cor

as

e

ed

 (

 s

83

co

), t

re

h

. 

is 

No

up

he

 a

le

ls

ss

o h

, t

a

he

s 

 m

th

e

e la

dia

r

n

ge

 le

st

pe cent) with net vel of 

an

l,

ce

 p

 s

ro

co

pe

re 

rti

s a

s w

 c

it

om

h 

p

a s

os

co

it

r

e m

e a

e

b

a

ov

su

e 

re

60 

 b

a

as

re

ed 

 co

n 

si

a s

de

e

re

rie

d 

s 

to

of

 b

 o

e 

ther 

ica genera

cturing (61) periods. A worrisom

e

e

dian perform

xc

e ratio variable is intended to gauge whether the operating incom

es to cover operating expenses in both periods. 

e

a 

es. The data indicate that, while the post-restructuring ratio has 

e typ s e for t tes all roups have
Table ompariso tr t Restru gs (903 R u 0

6.5: C

cturin

n of Pre- and Post-Res

estructurings Closed d

ucturing Performance of Comple

ring Calendar Years 2000 and 20

ed Lite Restru

1)

FULL RESTRUCTURING

Median LITE RESTRUCTURING

Closed at 

Market Rent 

Closed at 

Exception Re

Pre-restructuring REAC Physical Inspection Score 82 83 77 Post-restructuring REAC Physical Inspection Score 85 82 79 Pre-restructuring REAC Financial Performance Score 80 71 72 Post-restructuring REAC Financial Performance Score 75 68 61 Pre-restructuring Expense-to-income Ratio 0.64 0.62 0.78 Post-restructuring Expense-to-income Ratio 0.70 0.84 0.94 Pre-restructuring Debt-service-coverage Ratio 1.82 1.20 1.24 Post-restructuring Debt-service-coverage Ratio 1.27 1.17 0.78 Pre-restructuring Quick Ratio 1.11 0.68 0.72 Post-restructuring Quick Ratio 1.20 0.70 0.47 Pre-restructuring Surplus Cash $742 $248 $28 Post-restructuring Surplus Cash $287 $99 -$97 

Proportion of Properties with Increased REAC Physical Inspection Scores 57% 46% 57% 

Median Percentage of Score Increases 16% 14% 22% 

Proportion of Properties with Decreased REAC Physical Inspection Scores 41% 47% 43% 

Median Percentage of Score Decreases -11% -12% -10% 

Proportion of Properties with Increased REAC Financial Performance Scores 30% 37% 31% 

Median Percentage of Score Increases 8% 15% 24% 

Proportion of Properties with Decreased REAC Financial Performance Scores 68% 63% 67% 

Median Percentage of Score Decreases -11% -17% -28% 

Proportion of Properties with Increased Expense-to-Income Ratio 77% 96% 86% 

Median Percentage of Increases 16% 36% 27% 

Proportion of Properties with Decreased Expense-to-Income Ratio 22% 4% 13% 

Median Percentage of Decreases -7% -7% -11% 

Proportion of Properties with Increased Debt-service-coverage Ratio 18% 47% 43% 

Median Percentage of Increases 22% 44% 93% 

Proportion of Properties with Decreased Debt-service-coverage Ratio 82% 53% 56% 

Median Percentage of Decreases -31% -49% -113% 

Proportion of Properties with Increased Quick Ratio 55% 43% 33% 

Median Percentage of Increases 85% 95% 164% 

Proportion of Properties with Decreased Quick Ratio 44% 57% 67% 

Median Percentage of Decreases -51% -53% -59% 

Proportion of Properties with Increased Surplus Cash 20% 39% 30% 

Median Percentage of Increases 19% 14% -96% 

Proportion of Properties with Decreased Surplus Cash 80% 61% 70% 

Median Percentage of Decreases -62% -74% -76% 

Number of Properties 362 285 77 

 98 
Evaluation of Mark-to-Market Program

As mentioned earlier, DSCR is a measure indicating whether the properties are generating 

sufficient revenues to cover the mortgage debt service. A DSCR that is less than 1 means tha

the property does not have adequate revenues to cover its mortgage payments. Our tabulation

in Table 6.5 reveals that the median DSCR has decreased across all restructuring outcome

types in the post-restructuring period. For Watch List properties and Fulls closed at exception

rent, the median DSCR has fallen to a level that is less than 1. 

Quick ratio is a variable used to measure financial liquidity. It is defined as the total of

t

cash

nd equivalents plus accounts and notes receivable, divided by the current liabilities. A ratio

oth

sh on hand exceeds

ccounts payable as of the date of the financial statements. Positive surplus cash indicates 

thus,

that

ive

ss the

es and

st

ance 

in both the pre- and post-restructuring periods among the cohorts of restructuring outcome

types we examined. In comparison, a sizable portion of the Fulls closed at exception rent and 

Watch List properties have values for many of the financial performance indicators in the 

post-restructuring period that are worrisome. Given the limited amount of post-closing 

financial data available (one to two years), it is difficult to assess the longer term financial 

performance of these properties. An encouraging sign is that, according to data collected by 

the Office of Housing, the number of defaults that have occurred to this portfolio of 

properties is very small. 

Conclusion 

M2M is a HUD program that addresses fully the issue of funding ongoing rehab and capital 

replacement needs. This is unlike conventional market multifamily financing, which expects 

 

a

of 1 or above indicates ample liquidity. Our analysis shows that, except for the Lite 

restructurings, all other restructuring outcomes have a quick ratio that is below 1 in b

periods. In addition, the Watch List properties and exception rent Fulls have experienced a 

decline in the median quick ratio. 

Our last property performance measure is surplus cash from the audited Annual Financial 

Statements submitted to HUD. Surplus cash is the amount by which ca

a

that the property has cash over and above the amount needed to clear its payables (and,

that the property had positive cash flow during the year). Negative surplus cash indicates

the property does not have sufficient cash to cover its payables (and, thus, either had negat

cash flow during the year, or had insufficient positive cash flow to retire its year-beginning

excess payables).23 As shown in Table 6.5, median surplus cash has declined acro

board after restructuring for the cohort of restructurings we examined. While the Lit

Fulls closed at market rent still maintain a positive level of median surplus cash in the postrestructuring period, surplus cash for exception rent Fulls and Watch List properties has 

dropped to a negative level. This suggests that many exception rent Fulls and Watch Li

properties have experienced cash flow problems since the restructuring. 

To summarize, it appears that the Lite group of properties has the best financial perform

23 In general, a property that has positive surplus cash will distribute it, either to the owner or to the Residual 

Receipts account. For such a property, positive surplus cash at the next year end reflects the property’s positive 

cash flow during the year. 

 99 
Evaluation of Mark-to-Market Program

a resale and recapitalization every few years. It also is unlike other FHA programs, which 

typically have provided per-unit-per-year contributions to replacement reserves appropriate 

to early years of a new property, but not large enough for the 40-year mortgage term. Funds 

r rehab escrow and initial illion and 

illion for the cohorts of Full transactions closed through early August 2003. Owners 

are also required to make annual deposits to the replacement reserves account. These funds 

m

for

tten

licy introduced in early 2002. However, at the time of this 

valuati

allo u

Our exam

cus n

financi s than in the pre-restructuring period. For example, there is 

evidence that som e to cover 

pe i nce is not

mediately clear. Since we have only one to two years’ financial data for the postest ct epresentative of long-term performance. These 

roperti

imp ta

ance in the poste

fo

$164 m

deposit to replacement reserves totaled over $114 m

represent a tangible benefit for tenants living in these HUD-assisted properties. As a result of 

M2M, these tenants are able to live in higher physical quality, better maintained units. 

Relative to financing in the conventional market and other FHA programs, the M2M progra

has employed a set of underwriting standards that are specifically tailored for these 

properties. The standards, in theory, will foster long-term financial and physical viability

these properties. This is especially the case for the cohorts of projects that were underwri

with the “expense cushion” po

e on, HUD has not collected adequate financial data in the post-restructuring period to 

w s to examine these properties’ actual long-term performance. 

ination of cohorts of transactions that were underwritten before the “expense 

hio ” standard reveals that many of these projects have lower values on some of the

al performance indictor

e had negative surplus cash and did not have sufficient incom

o rat ng expenses and debt service. The reason for this underperforma

im

r

p

ru uring period, the results may not be r

es deserve further investigation based on longer-term financial data. It will also be 

or nt to test whether transactions that were processed with the “expense cushion”

underwriting standards since early 2002 have better financial perform

restructuring period relative to the earlier cohorts, once their financial statement data becom

available. 

 100 
Evaluation of Mark-to-Market Program

7. The Prospective Study 

he Pro

e of the evaluation’s data collection. Fifteen case 

studies of properties in the M2M “pipeline” during the study period (March through 

ovember 2003) were conducted. The data collection methodology was a series of openng

• Other individuals, such ager or HUD field staff, who

could provide perspect

e

rest ct

wit a

visit to

A senio

each visit the researcher conducted interviews with onsite property managers and a sample of 

tena ts

wit A

lso ab tatives, such as Housing Authority staff, who had

n i er

he ob re to:

Introduction 

T spective Study component of the M2M evaluation was designed to provide a 

“snapshot” of M2M operations at the tim

N

ended discussions with the major stakeholders in each of the 15 restructuring processes.

These stakeholders included: 

• The lead underwriter for the PAE with responsibility for negotiating the restructuri

agreement. 

• The owner and/or an owner’s representative who were directly involved in the 

restructuring process. 

• Individuals responsible for onsite management of the property. 

• A sample of tenants at the property. 

as the OMHAR relationship man

ive on the restructuring process.

Data collection for each case study typically began with telephone interviews with the PAE

underwriter and the owner/owner’s representative. In approximately half the cases, th

ru uring process had proceeded sufficiently to enable PAEs to supply the researchers

h b ckground documentation (e.g., draft restructuring models) prior to a researcher’s site 

a property.

r member of the research team conducted a site visit to each of the 15 properties. On 

n . Whenever possible, the site visits were also used to conduct face-to-face interviews 

h P E staff and owners and owner representatives. In some cases the researchers were 

a le to interview community represen

a nt est in the restructuring.

T jectives of the site visits we

• Obtain the onsite property manager’s perspective on the operational history of the 

property and the likely impact of the restructuring. 

 101 
Evaluation of Mark-to-Market Program

• Obtain a confidential tenant perspective on the quality of the property management, 

as well as an assessment of the level of tenant participation in the restructuring. 

• Obtain both management and tenant perspectives on the possibility of the tenants 

• diately adjacent to the 

property, for example, a neighborhood undergoing gentrification. 

oved Plans, it was requested from the PAE. 

ngoing telephone interviews with PAE staff and owners were conducted on particular 

r a

3).

e

s for

tive Study. Criteria employed in the selection of the properties included: 

of the Prospective Study was

to develop a “snapshot” of the M2M process, the team wanted to observe all stages of 

the r ng process. T hi ro electe as

the proce hile othe selected b use they were fairly

e process.

• Restructure Type. The team wanted the opportunity to observe the M2M process for 

Restructuri

 wanted to observe the underwriting process as managed by both 

PAEs.

ype. The selection process aimed to include a higher proportion of Section 

ies in the sa as oppos Section 8 “e rly” proper

• Make an assessment of the general physical condition of the property. 

being able to use vouchers instead of receiving a project-based subsidy. 

Document the characteristics of the neighborhood imme

Subsequent to each site visit, the researchers remained in contact with owners and PAE 

underwriters to document progress (or lack thereof) in the restructuring. As additional 

documentation became available, such as appr

O

points of interest. Data collection continued for each property in the sample, until eithe

restructuring was completed or the data collection period had ended (November 1, 200

The full case studies for each of the 15 properties appear in the second section of this report.

In this chapter we present a descriptive overview of the 15 properties followed by a cross-sit

analysis of the case study data. This presentation begins with a discussion of the 

methodology employed to select the Prospective Study sample. 

Sampling Methodology

The research team employed a purposive sampling approach to select the 15 propertie

the Prospec

• Stage in the Restructuring Process. Since the objective

estructuri o achieve t s goal, some p perties were s d just

they were beginning ss, w rs were eca

far along in th

both Lite and Full ngs.

• PAE Type. The team

public and private

• Tenancy T

8 “family” propert mple ed to lde ties.

 102 
Evaluation of Mark-to-Market Program

• Properties with Exception Rents. The selection criteria were weighted toward these 

properties in order to document conditions that justified rents in excess of established 

market rents. 

the M2M

• 

d

n add factor limited the number of properties in the sample that were 

e PAE to two. This was done in an effort to minimize the burden on PAE 

staff. This limitation also enabled the project team to observe the underwriting process at 

most of the large PAEs supporting OMHAR. 

The OMHAR tracking database was the source for the sample selection. Based on the 

proportion of Lites and Fulls in process at that time, it was decided to select a sample 

composed of 12 Fulls and 4 Lites. During the course of initial contacts with PAEs it was 

discovered that a number of the Lites in the sample were actually being processed as Fulls. 

During the data collection period it proved impossible to identify “Lite” restructurings that 

et the other selection criteria. In the end, the Prospective Study sample consisted of 13 Full 

est ct

percent

A numb

before

cases. T

Table

Final Composition of the Prospective Study Sample 

• High and Low Poverty Census Tracts. The team wanted to observe how

process played out in a variety of socioeconomic environments. 

A Mix of “Large” and “Small” Owners. The team wanted to observe if there were

any differences in the M2M process between owners of large Section 8 portfolios an

owners with a few or only a single Section 8 property. 

A itional selection

handled by the sam

m

r ru urings and one Lite restructuring. This actually reflected the proportion of Lites (12

) in process at the time. 

er of the properties in the initial sample were eliminated, either because they closed 

interviews could be conducted or because they were no longer considered active

he final composition of the Prospective Study sample is shown in Table 7.1. 

7.1

Property M2M Type Tenant Type No. of Units 

Exception

Rent 

Russell Erskine, Huntsville, AL Full Elderly 66 

No Cost Plan 

Yet Developed

Winthrop, Tacoma, WA Full Family 194 No 

Myrtle Manor, Phoenix, AZ Full Family 44 No 

Kingsley Park, Essex, MD Full Family 312 No 

Murphy Blair, St. Louis, MO Full Family 68 Yes 

Lynne Acres, Shelbyville, KY Full Family 40 No 

Six Chimneys, Cleveland, OH Full Disabled 46 No 

Valley Heights, Quincy, CA Full Family 48 Yes 

Genesee Towers, Utica, NY Full Elderly 66 Yes 

Eastward Court, Casper, WY Full Family 32 Yes 

Sneedville Gardens, Sneedville, TN Full Family 50 No 

Villa 14, Ault, CO* Full Elderly 36 No 

Village Green, Red Bay, AL* Full Family 48 Yes 

Fair Park, Sardenia, OH Full Family 41 N/A 

College Park, Lancaster, CA Lite Family 78 N/A 

*Properties that were originally selected as Lites but later became Fulls. 

 103 
Evaluation of Mark-to-Market Program

ple include the following: 

the total universe of FHA-insured 

of the properties was 62 units. 

ed portfolio. However, the

small unit size was representative of properties in the M2M pipeline at the time of

data collection. 

• Most of the properties were constructed under the Section 8 NC/SR programs in the 

early 1980s. Ten of the properties had been constructed between 1981 and 1983. 

e properties were very similar in construction type: detached garden-style 

apartments of one, two, or three stories. The properties normally had large amounts of 

open space between buildings. The sample also included several older buildings, 

including apartment complexes or hotels built in the first half of the twentieth century 

abilitated at th came part of o he

structures were located in Tacoma, Washington; Cleveland, Ohio; U Ne

Mar , Missouri; and Hu labama. 

n the whole, the properties in the sample were in good physical condition. With a 

notable e Murphy B . L the p s

ared to a

ses wh significant rehabilitation in the f 2 months of

tructuring, this was not due to an unaccep l of deferre intenance. It 

represented normal replacement cycles, such as appliances, or significant 

rades th he value of the as inst on o

ditio

• Most of the properties in the sample were located in relatively well tai

idential and/or commercial districts. This characteristic may be associated with a 

era all communities in the sample. T f th

ties i

imore)—were located in “improving” neighborhoods. Again, Murphy Blair was 

o ssed” neighb

ajority of the properties had maintained close to 100 percent occupancy, at least 

the ne e lack o l un n small and 

siz , although it is also cation of a high and for 

dable housing in these communities, particularly considering the long waiting 

t a hig n properti urp r

Louis, Missouri and Village Green in Red Bay, Alabama—had significant 

ates.

Characteristics of the Sample 

Salient characteristics of the Prospective Study sam

• The properties were relatively small compared to

Section 8 multifamily properties. The average size

This compares to the average 103 units in the FHA-insur

Thes

and reh e time they be the Section 8 pr gram. T

tica,

se

w York;

Essex, yland; St. Louis ntsville, A

• O

few

e

exceptions, such as th

have been well managed with an acceptable level of m

lair property in St ouis,

intenance. Even 

ropertie

app

in ca ere there was a need for irst 1

a res table leve d ma

often

upg at would improve t property, such allati f central

air con ning.

-main ned

res

prepond nce of medium and sm hree o e urban

proper n the sample—in Tacoma, Cleveland, and Essex (just outside of 

Balt

an excepti n, located in a “distre orhood.

• The m

over ar term. This may reflect th f comparable renta its i

medium e communities an indi dem

affor

lists a

in St.

h proportion of the properties. O ly two of the es—M hy Blai

vacancy r

 104 
Evaluation of Mark-to-Market Program

The M2M Process for the Prospective Study Sample

The b

rest ct

st ct

• M2M status at close ection

• in HAP re sed or

d net saving unit o tructurin

where available). Net kes into uced Section 8 cost s

st the FHA insurance nd, and OM ent 

cond or third mort present

s, Rent Reducti Saving

ta les 7.2 and 7.3, immediately below, summarize the major steps in the M2M

ru uring process during the study’s eight-month timeframe. The aspects of the 

re ru uring process documented in Table 7.2 are: 

• M2M status at start of the data collection period. 

of the data coll

nts either propo

s to H perperiod.

Decrease implemented. 

• Estimate UD ver 20 years of res g agreement 

( savings ta account red s, claim

again fu HAR’s estimate of the potential repaym

of se gages, in value terms. 

Table 7.2 

M2M Statu on, and s

Property Initial Status Closing Status

Rent 

Reduct

ion 

NPV of

Savings 

Per Unit

Over 20 

Years 

Russell Erskine Assigned to PAE Draft Plan NA NA 

Huntsville, AL 

Winthrop 

Tacoma, WA 

Owner Submits Data Collection Rept. Revised Plan 8% ($4,640) 

Myrtle Manor 

Phoenix, AZ

Referred from Field Office Owner Commitment 

Executed 

34% $50,000 

Kingsley Park 

Essex, MD 

Appraiser Assigned by PAE Draft Plan 6.8% NA 

M

S

urphy Blair Owner Approves COI Draft Plan 15% ($8,163) 

t. Louis, MO

Lynne Acres 

Shelbyville, KY 

Owner Approves COI Plan Approved 24% $11,625 

Si

C

x Chimneys PAE Completes Due Diligence 

lev n

Approved Plan 38% $12,360 

ela d, OH

Valle

Quincy, C

y Heights

A

Plan in OMHAR Review Closed 13% ($15,194) 

Genesee

Utica, NY

Towers Plan in OMHAR Review Plan Approved 23% $10,613 

Eastward

Casper,

Court 2

WY

PAE Completes Due Diligence Closed 45.3% $10,32

Sneedvil

Sneedvil

le Gardens

le, TN

Plan in OMHAR Review Closed 15.4% ($871) 

Villa 14 

Ault, CO 

Plan in OMHAR Review Closed 17.5% $11,982 

Village G

Red Bay

reen

, AL 

PAE Completes Due Diligence Draft Plan Submitted NA NA

Fair Park

Sardenia, OH

PAE Developing Same NA NA 

College P

Lancaste

ark

r, CA

Lite Agreement under OMHAR Review Final Review 28% $9,229 

NA = Not Available. 

 105 
Evaluation of Mark-to-Market Program

Tab 7

• 

• 

• 

Table

le .3 presents the following restructuring items for each property in the sample: 

Per-unit rehab expenditures in 12-month initial rehab plan. 

Reasons for lack of progress to restructuring agreement (where applicable). 

Exception rents as percentage of market rents (where applicable). 

7.3: Per-Unit Expenditures, Progress and Exception Rents 

Property

Per-Unit 

Rehabilitation 

Expenditures 

Reason for Lack of 

Progress Exception Rents 

Russell Erskine NA Change in ownership NA 

Winthrop $4,369.00 No problems 109% 

Myrtle Manor $318.20 No problems NA 

Kingsley Park NA Community opposition NA 

Murphy Blair $3,589.00 Unit condemned 105.5% 

Lynne Acres $810.25 No problems NA 

Six Chimneys $2,460.00 No problems NA 

Valley Heights $3,702.00 No problems 125% 

Genesee Towers $6,364.00 Two owner appeals 146%

Eastward Court $9,953.50 No problems 110% 

Sneedville Gardens $1,041.00 No problems 109% 

Villa 14 $944.50 No problems NA 

Village Green $4,660.00 Ownership change NA 

Fair Park NA Owner refusal NA 

College Park NA No problems NA 

NA = No

The fin

M2M p

• f administrative efficiency. Given the 

requirements of the M2M underwriting process, the properties in the sample moved 

derstood

the parameters that would meet OMHAR’s underwriting requirements. In most cases 

M2M had become a process that would identify a site-specific approach that would 

meet those parameters, rather than a negotiation. 

t Available.

Salient Characteristics of the M2M Process for the Prospective

Study Sample 

dings from the Prospective Study sample permit some general conclusions about the 

rogram as it was operating in 2003. 

The program exhibits a significant degree o

toward restructuring agreements with relative efficiency. Six properties moved from

an in-process stage to closing or virtual closing within the 6- to 7-month data

collection timeframe. In those cases where the process had stalled, the key factors 

were external to the administrative procedures developed by OMHAR. Such factors 

included major deficiencies in property maintenance (Murphy Blair), disagreements 

at the local political level about the future of the project (Kingsley Park), and 

proposed or actual changes in property ownership (Fair Park and Red Bay). This 

efficiency reflects the experience level of the PAEs. By 2003 the PAEs un

 106 
Evaluation of Mark-to-Market Program

• The process places a heavy emphasis on preservation of affordable housing. As 

the data indicate, OMHAR has been willing to approve restructurings that are likely 

to result in increases in HUD expenditures, including Winthrop, Village Heights, 

Sneedville Gardens, and Murphy Blair. It has also attempted to preserve properties 

that have had significant vacancy rates, such as Red Bay, where the pre-M2M 

vacancy rate was more than 20 percent. Current operational procedures appear to 

favor a de facto presumption of the need for project-based assisted housing unless 

there is considerable evidence to the contrary. This is clearly in accordance with the 

intent of the MAHRA legislation. The main factor that appears to recommend not 

finalizing an agreement is the effect of significant vacancy rates on the project’s longterm financial viability. 

nput into the

y

was an existing governmental interest (such as a redevelopment effort) local officials 

an interest in the restructuring.

the restructuring has little immediate impact

s

se the housing is already of good quality).

• The restructuring process is essentially an OMHAR/PAE/Owner negotiation. 

There is limited involvement of external stakeholders in the restructuring process. In

only a couple of instances (Kingsley Park and Winthrop) were there i

process by local elected officials or local agencies. There was also no real input into 

the process by tenant organizations. There was only one instance of active 

involvement of the ITAG/OTAG organizations that were a major feature of the 

authorizing legislation. Negotiations proceeded at the technical level between the 

PAE underwriter and the owner’s representative. Wider issues of local housing polic

were seldom discussed with local officials in detail. This was despite the fact that

PAEs met all requirements for notification of local authorities. Except where there 

did not take

• The M2M process does not change the ownership type of the properties. Only 

one of the owners in the sample was a nonprofit organization. This was a foundation

that operates a housing development with onsite services for individuals with 

developmental disabilities in Cleveland, Ohio. For the most part, the ownership cadre

for the Section 8 properties after M2M is the same set of owners/developers who 

were directly involved in the construction or development of properties at the outset 

of the current Section 8 multifamily program. 

• In a high proportion of the cases

on the tenants. As Table 7.3 indicates, the per-unit amount of rehabilitation 

completed during the first 12 months of a restructuring agreement varies widely. In

some cases (e.g., Winthrop, Eastward Court, and Village Heights), the repair amount

are quite substantial. In those cases the tenants will receive immediate benefits. In a 

majority of cases, however, the per-unit expenditures are quite modest and the 

restructuring will provide little or no short-term enhancement to the housing quality 

offered to tenants (often becau

• The current formula for the restructuring provides a high degree of confidence 

in the properties’ long-term financial viability. For the majority of properties, the 

major players in the negotiating process—the PAE underwriters and the owners’ 

representatives—saw no major threats to the long-term financial stability of the 

 107 
Evaluation of Mark-to-Market Program

properties. The underwriting guidelines, as of 2003, had factored in the recently rap

increases in such major expense items as insurance and utilities. In addition, the

inclusion of “payables” as an item in the final restructuring agreement reduces the 

short-term financial liability of properties. Negotiations between owners and 

underwriters focused mainly on such items as the short-term “rehab” expenses to be 

covered by the owner. The details of the

id

refinancing and reserve requirements had 

become essentially “pro forma” aspects of the negotiations. 

al

ers had a

lear understanding of the restructuring process. The underwriters, in particular, knew what 

R had established for completing financial restructurings. 

he M2M process, however, has not become standardized. A review of the 15 cases clearly 

that

f

e

ice

e time the property entered M2M, many of the units at Kingsley 

ark were occupied by these prospective voucher users. Several informants suggested that a 

ms. 

he owner of Kingsley Park has been willing, for a considerable amount of time, to negotiate 

a restructuring agreement with OMHAR, although County officials have strongly opposed a 

new long-term contractual agreement for a development as large as Kingsley Park (312 

units). The owner has explored ways to finance a redevelopment that would downsize the 

property, but OMHAR staff indicated they believe there is a need for more affordable rental 

Complicating Factors 

The characteristics of the restructuring process presented immediately above focus on typic

features of the negotiations as of 2003. For the most part, both owners and underwrit

c

guidelines OMHA

T

shows that many of the restructuring negotiations had unique, site-specific complications

could either stall or otherwise complicate the process. Both underwriters and OMHAR staf

continued to deal with novel situations for which there was no clear policy guidance. Som

of those complicating factors are discussed below on a site-specific basis. 

Kingsley Park 

Kingsley Park is an unusual M2M property. The County housing authority administers the

Section 8 contract because the property is subsidized under the Section 8 Moderate 

Rehabilitation program. The Baltimore County Housing Department provides transitional 

housing in vacant units at the Kingsley Park property for households on the Housing Cho

Voucher waiting list. At th

P

high proportion of the transitional tenants placed at Kingsley Park from the voucher waiting 

list had a history of behavioral proble

There was also a high level of drug activity on the property, which is located in Essex, an 

older suburb of Baltimore, in the jurisdiction of Baltimore County. The neighborhood 

immediately adjacent to the property has been “gentrifying” in recent years. County policy 

has been to attempt to reduce the number of subsidized multifamily units in the County. 

There had been a failed attempt to place Kingsley Park on a list of properties that the County 

could seize through eminent domain. 

T

 108 
Evaluation of Mark-to-Market Program

units than the 60 units envisioned by one of the downsizing plans. These opposing policy

objectives resulted essentially in a stand-off, with the County allowing only an interim

ntly

estructuring attempted to proceed in the 

e

operty indicated a need for major rehabilitation, including work on the 

undations and roof. During the restructuring process, one of the property’s buildings was 

a on the St. Louis housing market show high vacancy rates, although few threeedroom units are available in the local area. This was a major attraction for the tenants 

he

ould have been

eneficial to have a RAAP analysis early on in the negotiations. Instead of such a review, the

process has proceeded as a normal restructuring, with the attendant costs. It is not clear if this 

will result in any benefit to the tenants or low-income individuals in the 

ommunity. 

extension of the property’s operating contract. The M2M process meanwhile continued, with

development of a draft restructuring plan. It was still unclear at the end of the data collection

period whether Kingsley Park will remain a property with 312 small units or be significa

reconfigured through the restructuring process. 

The Kingsley Park case was a major exception among the 15 properties in the study sample. 

This was a case where the proposed financial r

middle of a public debate about the future use of the property. The M2M process, while 

efficient in most instances, is not designed to deal with active intervention by a wide variety

of local stakeholders. In cases such as this, the technical expertise of the OMHAR process 

needs to be supplemented by policy expertise and inter-governmental coordination.

Murphy Blair 

The Murphy Blair complex is located in a neighborhood called Old North St. Louis. The 

property has been poorly maintained, with consistently low REAC physical and financial 

scores. There has also been considerable turnover in onsite management throughout th

years, with the most recent management firm assuming responsibilities in July 2003. The 

onsite review of the pr

fo

cited for serious code violations and was condemned. 

Murphy Blair has provided a dilemma for the PAE underwriters and OMHAR. The draft 

restructuring plan estimated more than a $500,000 loss ($8,000 per unit) over 20 years. In 

addition, dat

b

residing at Murphy Blair. 

At the close of the data collection period, this restructuring was on hold while the issue of t

condemned building was addressed. 

The Murphy Blair case suggests the need for a mechanism that enables a quick determination 

to exclude a property from the M2M program. Whether some justification for the affordable 

housing at Murphy Blair could be developed is unclear. In this instance it w

b

investment of time

c

 109 
Evaluation of Mark-to-Market Program

Village Green 

Village Green is a 48-unit scattered-site property in the small rural community of Red Bay, 

Alabama. In the last several years the property consistently had vacancy rates above 20 

percent. In addition, the onsite review indicated considerable evidence of less-thansatisfactory maintenance. There was an obvious need for major repairs to the windows, 

interior walls, siding, and appliances. Some of the units that had been vacant for an extended

roperty had a

ge

folio to another (along with 40+ other Section 8 properties). The underwriters

developing the restructuring plan then had to assess the performance of the previous owner 

new owner to upgrade the physical plant. The new owners also

y that would bring occupancy close to 100 percent. The

nderwriters thus had to match historic performance data against an untested management 

ented restructuring 

greement. 

This property might have benefited from an interim arrangement that provided for an 

asse m

roperty on the Watch List, which may have enabled OMHAR to gauge the success of the 

to be a

iod it

lities.

ge of services seldom provided in Section 8 properties. These include a 

24-hour manned security desk, nursing services, a kitchen, and a variety of internal 

period appeared to be in significant disrepair.

Given these conditions, Village Green was an obvious candidate for possible exclusion from

the M2M process. In addition to the need for a major rehab investment, the p

reputation for criminal activity requiring police attention. The assigned underwriters for this 

property were aware of its possible marginality at the start of the M2M process. 

The situation was complicated further by a change in ownership during the early phase of the

M2M process. Ownership and management were transferred from one owner of a lar

Section 8 port

against the stated plans of the

proposed a marketing strateg

u

plan for the property. 

At the end of the data collection period, the PAE had submitted a draft restructuring plan to 

OMHAR. Because of its rural location, there may be a need for continued existence of this 

rental housing, although OMHAR indicated that it still had serious concerns with the high

vacancy rate. It was unclear if this property would proceed to an implem

a

ss ent of the new management team. One possibility would have been to place the 

p

new management in upgrading the property. The history of the property had appeared

“chicken and egg” situation where substandard maintenance led to a high vacancy rate, 

which in turn led to more substandard maintenance. At the end of the data collection per

was not at all certain if the new owners could break this cycle. Additional performance data 

would have provided an opportunity for more informed decision making. 

Six Chimneys

Six Chimneys is a congregate Section 8 property in Cleveland, Ohio that provides a full 

complement of support services to a tenant population that has severe learning disabi

The facility has a ran

 110 
Evaluation of Mark-to-Market Program

communication and monitoring systems. Funding for the facility’s service components is 

rovided by State and local agencies.

lied to the special needs of the tenant population. For example, could enhancements 

 (The Plan 

finally drafted for this property did not include these items.) 

y

approved restructuring plan. In this Plan the rehabilitation expenditures are lim

re norm

While t

frustration that the “service com

of

as

as in need of extensive repair when it entered the M2M restructuring process as a result of

poor maintenance. The PAE’s initial plan for rehabilitation identified nearly $900,000 in 

short-term repair needs. Three major items included in this plan were: 

• Major plumbing repairs ($365,000). 

• Elevator upgrades ($279,000). 

• Replacement of 450 corridor doors with fire-rated doors and hardware ($100,000). 

OMHAR made the decision to proceed with this restructuring even though the initial 

rehabilitation co would be a net

ss of $4,640 pe

rent and

revitalization ef

p

The complicating factor in this restructuring was the need for 12-month rehabilitation funds 

to be app

to the security and nursing stations be included in the restructuring package?

B the end of the data collection period this property had successfully negotiated an

ited to what 

a al HUD-funded items such as improvements to the heating system. 

he nonprofit owner was generally satisfied with the agreement, there was some

ponent” of the facility was not adequately addressed in the 

restructuring negotiations. Local officials would have been notified of the restructuring as a

matter of standard procedure, but no State or local agency took an active part in the 

negotiations. 

Winthrop Apartments 

Winthrop Apartments is a 194-unit, 12-story structure in the downtown business district

Tacoma, Washington. Of the 194 units, 174 receive Section 8 subsidies. The building w

originally constructed in 1924 as a hotel and remodeled into a Section 8 property in 1972. It 

w

sts would be substantial, and the net effect of the restructuring

lo r unit over 20 years. OMHAR made this decision despite a high rentalvacancy rate for the immediate area. In addition, some local officials desired a diffe

higher-end use for the property. The Winthrop property is in a downtown section of Tacoma

where there has been a major redevelopment effort in recent years. 

Because of local interest in redeveloping downtown Tacoma, the property has been the 

subject of discussions between the PAE, OMHAR, HUD staff, the Housing Director for the

city of Tacoma, and other local housing groups. These discussions focus on the “pros” of 

preserving affordable housing in downtown Tacoma versus the “cons” of Tacoma’s 

fort. 

 111 
Evaluation of Mark-to-Market Program

General Conclusions about Complications in Restructuring 

There appear to be at least three factors that can complicate a restructuring effort. These 

include: 

• Questions about whether a property is a needed and/or effectively managed Section 8 

property (Kingsley Park, Murphy Blair, Village Green). 

• The desire of local stakeholders to promote alternative uses for the property or to 

have meaningful input into the restructuring process (Kingsley Park). 

• An operating environment at a property that does not fit the picture of a standard 

Section 8 property (Six Chimneys, Winthrop, Kingsley Park). 

In such cases it is unclear that the current M2M process provided sufficient information to 

ed decisions. In marginal cases, OMHAR and PAE staff would benefit from

reater

on u

that cre

become

In the c

possibl

partner

ven w

OM A

This w

Kentuc

In all o

routine

At the t

underw

had sev

as a dis

of the P the

PAEs assigned cases to independent underwriters who operated essentially as independent 

onsult turing plan and negotiate a final

gr

From th tive

to proc with

reach inform

g input from the Multifamily Housing staff. This would provide a broader perspective 

ho sing needs (and projected needs) in a community, as well as increasing the likelihood

ative cooperative efforts could be undertaken. In short, the M2M process would

 less of a technical financial endeavor and more of a housing policy initiative. 

ase of local stakeholders, there probably needs to be a mechanism to ensure that 

e partners get involved in the process at an early stage. Involvement of possible 

s could also be explored for those properties that provide services other than housing.

E ith this review of complicating factors, it should be noted that a high proportion of 

H R restructurings went through the process in 2003 with few, if any, complications. 

as true for the properties in Ault, Colorado; Sneedville, Tennessee; Shelbyville,

ky; Lancaster, California; Casper, Wyoming; Phoenix, Arizona; and Cleveland, Ohio.

f these cases, the processing moved expeditiously and was treated as a relatively 

matter by the owners or the owner representative. 

The PAEs’ Perspective on the M2M Process 

ime of the project’s data collection, approximately 90 percent of the M2M 

riting was being conducted by the large, private PAEs. These organizations typically

eral real estate or financial service components, with the M2M underwriting handled

tinct unit of the larger entity. The majority of underwriters were full-time employees 

AE and could draw on the resources of the entire organization. However, some of

c ants and were paid fixed fees to develop a restruc

a eement with the owner. 

e perspective of the PAE and the independent underwriters, there is a major incen

eed with a restructuring. The PAEs receive fees on a property-by-property basis,

 112 
Evaluation of Mark-to-Market Program

incentiv

timefra

put from the underwriters handling the sample properties indicated that the entire 

restructuring process had become routinized. By 2003 there was a standard process for an 

M2M restructuring anticipated by the underwriters. This was due not only to their level of 

experience, but also to the availability of the final version of the financial model that must be 

used to develop each plan. The financial model now reflects OMHAR decisions on many 

underwriting issues that had delayed earlier M2M plans. In addition, beginning in 2002 

MHAR had established Memoranda of Understanding (MOUs) with the large PAEs. Those 

MOUs granted a PAE essentially a “first choice” option to handle all restructurings for 

specified owner was able to

stablish an ongoing working relationship with a given ownership entity.

d to

oth

considerable professional experience and experience handling M2M negotiations. For 

s experienced underwriters were given lead responsibility,

they could draw on the experience and expertise of senior staff in their organizations. 

• 

The

• 

re

pro forma fashion. Input from tenants indicated that the presentations 

to

• PAE staff were often able to anticipate OMHAR requirements and adjust the 

restructuring process accordingly. In one case the underwriter essentially put the 

restructuring process on hold for several months until the ownership entity had 

e payments if they complete certain stages of a restructuring within a specified 

me. The independent consultants receive their payments in a similar fashion. 

In

O

s of large portfolios of Section 8 properties. In such cases a PAE

e

Observation of PAE administration of restructurings for the 15 properties in the sample le

the following observations about the PAEs’ current role in M2M restructurings: 

• The majority of restructurings are directly handled by underwriters with b

the majority of properties the lead underwriter was able to provide owners with a 

clear description of the program’s requirements and likely outcomes. This experience 

also enabled PAE staff to identify third-party vendors (for example, for Physical 

Condition Assessments) whose work products would pass review by OMHAR. In 

those cases for which les

PAE underwriters often assumed a directive role in the development of a restructuring

agreement. The underwriter’s experience with M2M often enabled the underwriter to

have a fairly accurate “vision” of what was achievable under OMHAR’s established 

guidelines. In a high proportion of cases, once the data collection activities were

completed, owners were content to wait and see “how the numbers played out.”

likelihood that an underwriter would take a lead role increased for owners who had 

already successfully completed a number of M2M restructurings. 

PAE staff devoted considerable resources to meeting the tenant involvement 

requirements of the M2M process. There were no indications that these steps we

completed in a 

at the tenant meetings were clear, and the facilitators were willing to address any 

tenant concerns. (In the case of Six Chimneys, the PAE took considerable trouble

develop a meeting format that provided valid input from the developmentally 

disabled tenant population.) However, some of these meetings were scheduled on 

short notice, thus reducing tenant participation. 

 113 
Evaluation of Mark-to-Market Program

complet HAR would

require the m

e

in

he owners of several properties in the

ation

Of the

foundation sponsor owned one property. Two-thirds of the properties were owned by the 

me entities that developed the property at the time it entered the Section 8 portfolio. 

Some c

• 

(including the Lite restructuring in Lancaster, California) were

good candidates for a move to the unassisted market sector. For the most part, these 

t of

• ers

me routinized. 

One reason for this was that by 2003 the owner community had considerable 

• For the properties in the sample, most owners maintained a fairly passive role in 

f the 

• entious issue remaining for owners was the type and 

extent of the immediate rehabilitation items. While these items represented an 

to take

ed its annual financial statement. The underwriter knew that OM

ost recent financial data in a final review. This “hold” probably saved 

significant time and effort in the review stage of the restructuring process. 

• By 2003 PAE staff were able to make quick judgments on the feasibility of any Lit

applications. Use of the financial model enabled them to make such judgments with

days of receipt of an owner’s financial data. T

sample had applied for Lite restructurings, but then accepted the PAE determin

that they could proceed in M2M only through a Full restructuring.

The Owners’ Experience in the M2M Process 

15 properties in the sample, 14 were owned by private-sector ownership entities and a

sa

haracteristics of the owners’ participation in the M2M process included:

The owners had limited flexibility as to entering the M2M process. Only two or 

three of the properties

properties would retain their value for the owners only while they remained as par

the Section 8 portfolio. 

Most negotiations were carried out by owner representatives and not by own

of record. Thus, the owner input into the negotiating process had beco

experience dealing with OMHAR, the PAEs, and M2M. Most owners expected few 

surprises in a given restructuring. The holders of large Section 8 portfolios had 

established units in their organizations that dealt only with M2M issues. 

the negotiations (with a few notable exceptions). This reflected both their 

familiarity with the M2M program and a general confidence in the ability o

underwriters. 

The most common cont

opportunity to add to the value of the property, the owner had to “front” a significant 

portion of the cost (for most items, 20 percent). As of 2003 owners appeared

the view that the refinancing numbers “would work themselves out.” For properties 

with substantial short-term rehabilitation requirements, this was not the case. 

 114 
Evaluation of Mark-to-Market Program

The Tenants’ Experience in the M2M Process 

The M2M authorizing legislation attempted to ensure that Section 8 tenants were able to take

an active role in a restructuring. In addition, a major objective of the entire restructuring 

effort is to enhance the quality of services afforded to Section 8 tenants (even beyond the 

preservation of affordable housi

Observations of the restructuring process at the 15 properties in the sample led to the 

following general conclusions: 

• The involvement of tenant support and/or advocacy groups, such as the 

ITAG/OTAG grantees, appears to be almost non-existent. Among the case studies 

there was only a single example of such a group being involved in the negotiating 

process. Just as importantly, tenants expressed no knowledge that such groups were 

available for support or consultation. 

• The required tenant meetings appeared to be only moderately successful in 

ten

• 

ts also

The extent to which tenants have had substantive input into the prioritization of 

is the

• 

• The written notifications and descriptions of restructuring agreements provided 

 rent 

ng in a community). 

informing tenants about the restructuring process. These meetings were of

poorly attended. Even in cases where these meetings were well attended the majority 

of tenants at the property did not attend a meeting, and their knowledge of the M2M 

process was minimal. 

A high proportion of tenants interviewed for the study expressed skepticism 

about the ability to use vouchers as an alternative housing subsidy in their 

community. These responses might simply reflect a resistance to change when 

people had an established residency. However, a high proportion of tenan

indicated little or no understanding of how the voucher system works. 

•

rehab requirements for a property is unclear. The short-term rehab package

most immediate benefit a restructuring provides tenants. For most properties in the 

sample, tenant impact on this prioritization was minimal. 

It is unclear whether the requisite tenant meetings provided tenants with an

opportunity to express unguarded opinions about the quality of onsite 

management. This is an issue of prime importance to tenants. At a number of the

sites, however, the onsite management was actively involved, for at least a major 

portion of the meetings. 

to tenants, for the most part, were written in boiler-plate language not 

appropriate for tenant populations. More appropriate would have been materials 

that answered the core questions of most interest to tenants (for example, will my

be raised?). 

 115 
Evaluation of Mark-to-Market Program

• In five of the fifteen projects, tenants received short-term (12-month) rehab 

ts of this

In general, the M2M process is one that by 2003 was standardized and well understood by 

PAE underwriters and the owner com

specific conditions that would require substantive negotiations, special reviews, or unique 

technic

Red Ba

While s

when c

• heavily influence how an owner 

approaches the restructuring process. At one site in the sample, the property was in 

ow closed, and the property has been preserved 

for the Section 8 portfolio. 

• 

benefits worth more than $3,000 per unit. Short-term, major improvemen

type are the most tangible benefit perceived by tenants at the conclusion of a 

restructuring. 

Other Lessons Learned 

munity. This standardization did not preclude siteal solutions. At least three of the restructurings (Murphy Blair, Kingsley Park, and 

y) involved issues that could result in a failure to complete the process. 

ome are unique to a single case in the sample, the following lessons may prove useful 

onsidering OMHAR’s entire current and future portfolio:

Short-term economic developments may

an area that had experienced significant expansion of the private-sector rental market

in the mid-1990s. The economic downturn that began in 2000-2001 had a significant 

negative impact on that market. Without that downturn, it is possible that the

property’s owner might have tried to shift the property to the private sector at the

expiration of the HAP contract. Instead, the owner applied for a Lite restructuring. 

The PAE made a quick determination that the financial condition of the property

would not support a Lite. The owner then decided to proceed with a Full 

restructuring. This restructuring has n

Section 8 properties may serve tenant populations drawn from outside the 

immediate community. At one of the properties, nearly three-quarters of the units

were occupied by students attending the local community college. Nearly all of these 

students were from outside the immediate community. Interview data indicated that 

many of the students would not have been able to attend the college without the 

availability of subsidized housing. Thus, this property will now continue (the 

restructuring has closed) to meet the housing needs of a low-income population,

albeit one not drawn from the local community. In this case there was some doubt

that the property could maintain an adequate occupancy level without a constant 

stream of student tenants. 

• Even when well handled, the level of tenant participation remained small. One 

PAE had developed an exemplary tenant-notification form for tenant meetings. The 

language was clear, precise, and free of jargon. The PAE moved aggressively to 

distribute these notices around the property. Still, only 10 tenants showed up for a 

meeting. More effective approaches will need to be developed if HUD continues to 

place a heavy emphasis on tenant involvement. 

 116 
Evaluation of Mark-to-Market Program

• 

le

multifamily property. At one property, local stakeholders have vigorously opposed 

• The OMHAR structure is not well designed to bring “partners” into a 

the

h

is

y

• 

greater involvement of the providers in the M2M process. One 

property in the sample provides a 24-hour secure housing environment for a 

developmentally disabled population. The service component of this property is 

funded by a variety of State and local agencies. These agencies were not, however, 

involved in development of the M2M restructuring plan. Involvement of such 

providers would probably provide opportunities to leverage resources and enhance 

quality of life for tenant populations. 

• In assessing the justification for preservation, particularly in the case of 

exception rents or a substantive net loss to the government, the process needs to 

include a more expansive analysis of housing alternatives. The M2M process 

places a high value on preserving affordable housing. This orientation is appropriate. 

A high proportion of the properties in the sample were in small rural communities or 

small urban areas. Analysis of rental markets in such cases is normally restricted to 

the “built-up” areas in the vicinity. For the tenant populations in such areas there may 

be alternative assisted properties or other rental properties. In some cases the 

alternatives to Section 8 properties may be sub-standard housing units in isolated 

rural areas. Factors such as this should be considered when determining the level of 

tenant benefits such properties provide. 

• There needs to be a more effective mechanism for establishing the suitability of 

seriously deteriorated properties for restructuring. Some properties in the sample 

showed indications of sub-standard maintenance. Once the M2M application had 

been made, the PAE had the responsibility of determining if a viable restructuring 

package could be developed. The financial incentive in such cases, at the PAE level, 

is to see whether there is any way a restructuring plan can be made to work. In such 

The M2M program is ill-suited to address cases where key community 

stakeholders, including elected officials, oppose the preservation of an affordab

the preservation of a large multifamily property. There are possibilities for a 

compromise solution—a reduction in the number of subsidized units. It is not clear, 

however, what entity should be conducting such a negotiation. OMHAR’s mandate 

appears to be too narrow for it to assume such a role, but it is not clear what other 

parties should also be engaged. 

restructuring even when that appears to be the optimal strategy to provide

greatest benefit to tenants. In two cases, both involving large properties, a major 

redevelopment appeared to be the best strategy to meet the needs of both tenants and 

the local community. Identifying the partners that could be brought in to assist in suc

a redevelopment is not an anticipated role for either the PAEs or OMHAR. This

particularly true in the case of PAEs, whose performance is measured by their abilit

to move transactions through the system. 

At properties where external providers provide services to Section 8 tenants, 

there needs to be

 117 
Evaluation of Mark-to-Market Program

cases, it might be preferable to ask the PAE to demonstrate, with a heavy 

preponderance of evidence, ad on a restructuring. The gains

from preservation, however, are not always sufficient to justify large Federal costs. 

• S cal needs

f ants. Lack

of security can have a d ormance as it often drives up the 

vacancy rate. In some cases, tenants may be reluctant to bring up the issue because it 

solicit some

• In some places, exception rents are a necessary tool in preserving needed, 

s

ental

th

ly

local

the need to move ahe

ecurity should be made a more explicit concern when identifying criti

or a property. This is an issue frequently of paramount importance to ten

irect impact on financial perf

may reflect on the quality of onsite management. It may be advisable to

third-party input on this tenant concern. 

affordable housing. In one sample community, nearly one-third of the household

could qualify to live in the Section 8 property and there is little private-market r

housing. This community has had a nearly static economy for several decades wi

very little construction. Although exception rents may be appropriate for such a

community, there needs to be a consistent standard for justifying the requests. The

documentation for the exception rent properties in the sample ranged from high

detailed to that of simply boiler-plate language. The justification documentation

should demonstrate a clear understanding of the specific characteristics of a

housing market. 

 118 
Evaluation of Mark-to-Market Program Appendix A

Appendix A

Tables for Chapter 3 

on of Property Characteristics by Program 

Participation Status 

This appendix presents tables that comp

participation status in the program. The s prov he s inform a ables

in Chapter 3, but add information on distributions of key variables. 

In addition, Table A3.11 presents results of regression models that isolate the effects of 

e characteristic on the status of the p rty. Fo h m the ta es e

properties included and the dependent variable, followed by rows showing the effect of 

each variable. The dependent variable in each of these equations is a “yes/no” variable 

(the property either is or is not of the particular type—such as a Lite or a Full). Wh

dependent variable is categorical (yes/no) the regression model is estimated using the 

logistic estimation procedure, in which the probability of having a particular outcome

(e.g as a Full) is expressed as a ction o t of tion a p

characteristics expected to be associated with that outcome

Wh ical, one of the categories m st be excluded 

as the reference category in order for the regression to converge to a unique solution. The 

largest category is generally chosen as the omitted category for each characteristic and 

then ssentially a reference ca y. The essi sults c i ted

as t the probability of having a particular characteristic relative to having the 

reference characteristic. The reference category is indicated by “REF” in the table. For 

each variable “NS” indicates that the variable was not statistically significant in the 

regression. A “+” indicates the variable had a statistically significant positive effect on 

the probability of having a particular outcome, and “-” indicates a statistically significant 

negative effect. 

Comparis

are the characteristics of properties by 

table ide t ame ation s the t

ach rope r eac odel ble pr ents th

en the 

., closing fun f a se loca nd pro erty

. 

en the explanatory variable is also categor u

becomes e tegor regr on re an be nterpre

he effect on

 119 
Evaluation of Mark-to-Market Program Appendix A

Table A3.1 

Characteristics of Program Participants and Non-Participants 

Opt-Out** Entered Program

Non-Participants 

Except Opt Out 

Number Percent Number Percent Number Percent 

Number of Properties 1,096 2416 5,558 

Number of Units 122,837 205993 601,145 

Location 

Census region 

Northeast 125 11% 515 21% 1,089 20% 

Midwest 302 28% 583 24% 1,634 29% 

South 337 31% 971 40% 1,772 32% 

West 332 30% 347 14% 1,063 19% 

Metro Location

Central City 559 51% 1157 48% 2,903 52% 

Balance of Metro (Suburb) 401 37% 528 22% 1,551 28% 

Non-metro 136 12% 732 30% 1,104 20% 

Tract Characteristics 

Proportion of Vacant Hsg Units 

Average 8% 10% 8% 

0% to 5% 390 36% 495 21% 1,673 30% 

5% to 10% 416 38% 1013 42% 2,346 42% 

10% to 20% 234 21% 737 31% 1,305 23% 

20% + 56 5% 171 7% 234 4% 

Homeownership Rate 

Average 47% 49% 46% 

0% to 40% 389 36% 773 32% 2,080 37% 

40% to 60% 345 32% 612 25% 1,528 27% 

60% to 70% 200 18% 537 22% 990 18% 

70% + 162 15% 493 20% 960 17% 

Poverty Rate 

Average 18% 26% 22% 

0% to 10% 386 35% 315 13% 1,336 24% 

10% to 20% 370 34% 700 29% 1,685 30% 

20% to 30% 156 14% 555 23% 1,072 19% 

30% to 40% 95 9% 378 16% 727 13% 

40% + 90 8% 467 19% 738 13% 

Rent-to-Income Ratio 

Average 21% 22% 22% 

0% to 40% 557 51% 1221 51% 2,720 49% 

40% to 60% 439 40% 813 34% 2,037 37% 

60% to 70% 76 7% 303 13% 631 11% 

70% + 23 2% 80 3% 169 3% 

 120 
Evaluation of Mark-to-Market Program Appendix A

Table A.3.1 (Continued)

Characteristics of Program Participants and Non-Participants 

Opt-Out** Entered Program

Non-Participants 

Except Opt Out 

Number Percent Number Percent Number Percent 

Number of Properties 1,096 2416 5,558 

Number of Units 122,837 205993 601,145 

Percent Minority 

Average 32% 41% 38%

0% to 10% 322 29% 759 31% 1,731 31% 

10% to 25% 287 26% 393 16% 985 18% 

25% to 50% 217 20% 361 15% 980 18% 

50% to 75% 116 11% 275 11% 622 11% 

75% + 154 14% 626 26% 1,239 22%

Property Characteristics

Development Size 

Average Number of Units 112 85 108 

Less than 50 units 259 24% 687 28% 1,179 21% 

50-99 units 297 27% 976 40% 1,875 34% 

100-199 units 379 35% 614 25% 1,862 34% 

200 or more units 161 15% 138 6% 642 12% 

Unit Size 

Average number of bedrooms per unit 1.82 1.77 1.70 

Density 

Proportion of 3+bedroom units 19% 20% 19% 

Occupancy Type 

Family 956 87% 1646 68% 3,867 70% 

Elderly/disabled 140 13% 770 32% 1,691 30% 

Building Type 

High-rise/elevator 138 13% 622 26% 1,486 27% 

Other 958 87% 1794 74% 4,072 73% 

Age 

Average 26 23 26 

0-20 91 8% 492 20% 795 14% 

20-25 355 32% 1265 52% 1,727 31% 

25-30 321 29% 326 14% 1,586 29% 

30+ 329 30% 332 14% 1,451 26% 

HUD Program Type 

Older Assisted 767 70% 702 29% 3,249 58% 

Newer Assisted 329 30% 1714 71% 2,309 42% 

Mortgage Sponsor Type 

Profit Motivated 518 47% 1314 54% 1,996 36% 

Limited Dividend 446 41% 876 36% 2,125 38% 

Non-Profit 72 7% 217 9% 1,299 23% 

Other 61 6% 9 0% 138 2% 

 121 
Evaluation of Mark-to-Market Program Appendix A

Table A3.1 (Continued)

Characteristics of Program Participants and Non-Participants 

Opt-Out** Entered Program

Non-Participants 

Except Opt Out 

Number Percent Number Percent Number Percent 

Number of Properties 1,096 2416 5,558 

Number of Units 122,837 205993 601,145 

Mortgage Financed Type 

State HFA Bond Financed 17 2% 199 8% 487 9% 

Other 1079 98% 2217 92% 5,071 91% 

REAC Financial Performance Score

Average 63 66 68 

0-40 206 19% 247 10% 421 8% 

40-60 253 23% 574 24% 1,200 22% 

60-80 371 34% 1076 45% 2,523 45% 

80+ 265 24% 519 21% 1,414 25% 

REAC Physical Inspection Score 

Average 78 80 81 

0-40 22 2% 27 1% 54 1% 

40-60 115 11% 208 9% 374 7% 

60-80 424 39% 825 34% 1,907 34% 

80+ 535 49% 1356 56% 3,223 58% 

Per Unit Unpaid Principal Balance (UPB)

Average $15,954 $23,054 $18,687 

$0-$10,000 390 36% 431 18% 1,546 28% 

$10,000-$25,000 501 46% 946 39% 2,585 47% 

$25,000-$35,000 140 13% 664 27% 802 14% 

$35,000+ 65 6% 374 15% 625 11% 

Change in REAC Capital Deficiency

Score

Decrease or No Change 694 63% 1578 65% 3,624 65% 

Increase 402 37% 838 35% 1,934 35% 

Pre-restructure Sec. 8 Contract Rent to

FMR Ratio

Average 89% 129% 101% 

< 80% 415 38% 53 2% 1,576 28% 

80% to 100% 304 28% 264 11% 1,369 25% 

100% to 125% 317 29% 854 35% 1,478 27% 

125% to 150% 48 4% 738 31% 749 13% 

150%+ 12 1% 507 21% 386 7% 

 122 
Evaluation of Mark-to-Market Program Appendix A

Table A3.2 

Tenant Characteristics 

Program Participants and Non-Participants 

Entered Program

Non-Participants

Except Opt Out 

Number Percent Number Percent 

Number of Properties 2,118 5,355 

Number of Units 178,635 575,545 

Length of Residence (years) 

Average 4.76 5.22 

< 2.5 339 14% 419 8%

2.5 to 5 1077 45% 2,349 42%

5 to 8 813 34% 2,248 40%

8 + 187 8% 542 10%

Household Size 

Average 2.03 1.94 

< 1.15 557 23% 1,489 27%

1.15 to 2 406 17% 1,166 21% 

2 to 2.5 758 31% 1,523 27% 

2.5+ 675 28% 1,335 24% 

Percent Elderly Household 

Average 27% 36%

0% to 5% 624 26% 848 15%

5% to 20% 890 37% 1,914 34%

20% to 50% 352 15% 1,098 20%

50% + 537 22% 1,680 30% 

Percent Disabled Household 

Average 15% 13%

0% to 5% 466 19% 1,439 26%

5% to 10% 530 22% 1,307 24% 

10% to 20% 834 35% 1,754 32% 

20% + 570 24% 1,010 18% 

Average 28% 24%

0% to 5% 621 26% 1,769 32%

5% to 25% 344 14% 980 18%

25% to 50% 1059 44% 2,215 40%

50% + 355 15% 544 10%

Average 55% 52% 

0% to 10% 621 26% 1,379 25% 

10% to 50% 474 20% 1,356 24% 

50% to 80% 273 11% 749 13%

80% + 1046 43% 2,056 37%

 123 
Evaluation of Mark-to-Market Program Appendix A

Table A3.3 

Characteristics of Closed Properties – Closed Lites and Fulls 

All Closed Closed Lite Closed Full 

Number Percent Number Percent Number Percent 

Number of Properties 1187 391 796

Number of Units 104,852 37,256 67,596

Location 

Census region 

Northeast 239 20% 71 18% 168 21%

Midwest 252 21% 78 20% 174 22%

South 540 45% 146 37% 393 49% 

West 155 13% 95 24% 60 8%

Metro Location 

Central City 486 41% 197 50% 289 36% 

Balance of Metro (Suburb) 280 24% 108 28% 172 22% 

Non-metro 421 35% 86 22% 335 42% 

Neighborhood (Census Tract) Characteristics

Proportion of Vacant Hsg Units 

Average 10% 9% 10% 

0% to 5% 240 20% 105 27% 135 17% 

5% to 10% 536 45% 157 40% 378 48% 

10% to 20% 329 28% 112 29% 216 27% 

20% + 82 7% 16 4% 66 8% 

Homeownership Rate 

Average 52% 48% 54% 

0% to 40% 315 26% 120 31% 194 24% 

40% to 60% 323 27% 135 35% 187 24%

60% to 70% 286 24% 83 21% 203 26%

70% + 263 22% 52 13% 211 27% 

Poverty Rate 

Average 26% 24% 28%

0% to 10% 142 12% 68 17% 73 9% 

10% to 20% 353 30% 124 32% 228 29% 

20% to 30% 265 22% 79 20% 186 23% 

30% to 40% 185 16% 60 15% 125 16% 

40% + 242 20% 59 15% 183 23% 

Rent-to-Income Ratio 

Average 21% 22% 21% 

0% to 40% 645 54% 186 48% 459 58% 

40% to 60% 369 31% 155 40% 213 27%

60% to 70% 139 12% 37 9% 102 13%

70% + 34 3% 12 3% 22 3% 

 124 
Evaluation of Mark-to-Market Program Appendix A

Table A3.3 (Continued)

Characteristics of Closed Properties – Closed Lites and Fulls 

All Closed Closed Lite Closed Full 

Number Percent Number Percent Number Percent 

Number of Properties 1187 391 796

Number of Units 104,852 37,256 67,596

Proportion of Racial/Ethnic Minorities

Average 38% 40% 37%

0% to 10% 413 35% 125 32% 288 36%

10% to 25% 195 16% 68 17% 127 16% 

25% to 50% 162 14% 53 14% 109 14% 

50% to 75% 133 11% 49 13% 84 10% 

75% + 285 24% 96 25% 189 24% 

Property Characteristics of Closed Properties

Development Size 

Average Number of Units 88 96 85 

Less than 50 units 299 25% 83 21% 215 27% 

50-99 units 487 41% 147 38% 339 43% 

100-199 units 332 28% 132 34% 199 25% 

200 or more units 70 6% 28 7% 42 5% 

Unit Size

Average number of bedrooms per unit 1.78 1.68 1.84

Density 

Proportion of 3+bedroom units 250 21% 71 18% 178 22% 

Occupancy Type 

Family 788 66% 254 65% 535 67%

Elderly/disabled 399 34% 137 35% 261 33%

Building Type 

High-rise/elevator 301 25% 116 30% 185 23% 

Other 886 75% 275 70% 611 77% 

Age

Average 24 26 23 

0-20 95 8% 21 5% 75 9% 

20-25 726 61% 167 43% 559 70% 

25-30 170 14% 102 26% 69 9%

30+ 195 16% 102 26% 93 12% 

HUD Program Type

Older Assisted 389 33% 197 50% 192 24%

Newer Assisted 798 67% 194 50% 604 76%

Mortgage Sponsor Type 

Profit Motivated 659 56% 178 46% 481 60% 

Limited Dividend 394 33% 160 41% 234 29% 

Non-Profit 127 11% 53 14% 74 9% 

Other 6 1% 0 0% 6 1% 

 125 
Evaluation of Mark-to-Market Program Appendix A

Table A3.3 (Continued)

Characteristics of Closed Properties – Closed Lites and Fulls 

All Closed Closed Lite Closed Full

Number Percent Number Percent Number Percent 

Number of Properties 1187 391 796

Number of Units 104,852 37,256 67,596 

Mortgage Financed Type 

State HFA Bond Financed 80 7% 10 3% 70 9% 

Other 1107 93% 381 97% 726 91% 

Most Recent REAC Financial 

Performance Score 

Average 68 74 65 

0-40 82 7% 15 4% 67 8% 

40-60 265 22% 52 13% 213 27% 

60-80 561 47% 169 43% 391 49% 

80+ 280 24% 156 40% 124 16% 

Most Recent REAC Physical Inspection 

Score 

Average 81 84 80 

0-40 3 0% 0 0% 3 0% 

40-60 84 7% 20 5% 64 8% 

60-80 395 33% 113 29% 283 36% 

80+ 705 59% 259 66% 446 56% 

Per Unit Unpaid Principal Balance (UPB) 

Average $20,244 $15,515 $22,567 

$0-$10,000 244 21% 139 36% 105 13% 

$10,000-$25,000 570 48% 198 51% 373 47% 

$25,000-$35,000 286 24% 37 9% 249 31% 

$35,000+ 87 7% 17 4% 70 9% 

Change in REAC Capital Deficiency

Score 

Decrease or No Change 768 65% 242 62% 526 66% 

Increase 419 35% 149 38% 270 34% 

Pre-restructure Sec. 8 Contract Rent to

FMR Ratio 

Average 128% 119% 133% 

< 80% 20 2% 11 3% 9 1% 

80% to 100% 134 11% 71 18% 63 8% 

100% to 125% 426 36% 176 45% 250 31% 

125% to 150% 381 32% 95 24% 287 36% 

150%+ 226 19% 38 10% 188 24% 

 126 
Evaluation of Mark-to-Market Program Appendix A

Table A3.4 

Tenant Characteristics of Closed Properties – Closed Lites and Fulls 

All Closed Closed Lite Closed Full 

Number Percent Number Percent Number Percent 

Properties 1135 384 34% 751 66%

Units 99,597 36,691 62,906

Length of Residence (years) 

Average 4.52 4.70 4.43 

< 2.5 132 12% 37 10% 124 17% 

2.5 to 5 363 32% 176 46% 355 47% 

5 to 8 242 21% 155 40% 234 31% 

8 + 46 4% 16 4% 38 5% 

Household Size 

Average 2.01 1.90 2.07 

< 1.15 165 15% 122 32% 157 21% 

1.15 to 2 121 11% 57 15% 113 15% 

2 to 2.5 278 25% 105 27% 270 36% 

2.5+ 213 19% 99 26% 205 27% 

Percent Elderly Household 

Average 29% 36% 25% 

0% to 5% 202 18% 81 21% 194 26% 

5% to 20% 297 26% 132 34% 289 39% 

20% to 50% 126 11% 38 10% 118 16% 

50% + 155 14% 131 34% 147 20% 

Percent Disabled Household 

Average 15% 14% 16% 

0% to 5% 122 11% 94 24% 114 15% 

5% to 10% 177 16% 87 23% 169 22% 

10% to 20% 272 24% 132 34% 264 35% 

20% + 208 18% 69 18% 200 27% 

Percent Female-headed Single Parent Household with Children 

Average 28% 25% 29% 

0% to 5% 178 16% 140 36% 170 23% 

5% to 25% 113 10% 45 12% 105 14% 

25% to 50% 373 33% 142 37% 365 49% 

50% + 109 10% 50 13% 101 13% 

Percent Racial/ethnic Minority-headed Household 

Average 51% 54% 50% 

0% to 10% 241 21% 104 27% 233 31% 

10% to 50% 158 14% 75 20% 150 20% 

50% to 80% 83 7% 41 11% 75 10% 

80% + 300 26% 163 42% 292 39% 

 127 
Evaluation of Mark-to-Market Program Appendix A

Table A3.5 

Location Characteristics of Closed Fulls – Market Rent versus Exception Rent 

All Fulls Full at Market 

Fulls at 

Exception Rent

Number Percent Number Percent Number Percent 

Number of Properties 796 572 224

Number of Units 67596 50311 17285

Location 

Census region 

Northeast 168 21% 116 20% 52 23%

Midwest 174 22% 120 21% 54 24%

South 393 49% 294 51% 99 44%

West 60 8% 42 7% 18 8%

Metro Location 

Central City 289 36% 206 36% 83 37% 

Balance of Metro (Suburb) 172 22% 134 23% 38 17% 

Non-metro 335 42% 232 41% 103 46% 

Neighborhood (Census Tract) Characteristics

Proportion of Vacant Hsg Units 

Average 10% 9% 12%

0% to 5% 135 17% 117 20% 18 8% 

5% to 10% 378 48% 281 49% 97 43% 

10% to 20% 216 27% 135 24% 82 36% 

20% + 66 8% 39 7% 27 12% 

Homeownership Rate 

Average 54% 54% 54% 

0% to 40% 194 24% 134 23% 61 27% 

40% to 60% 187 24% 133 23% 54 24% 

60% to 70% 203 26% 155 27% 48 22%

70% + 211 27% 151 26% 61 27% 

Poverty Rate 

Average 27% 26% 31%

0% to 10% 73 9% 64 11% 9 4% 

10% to 20% 228 29% 168 29% 61 27% 

20% to 30% 186 23% 135 24% 51 23% 

30% to 40% 125 16% 91 16% 33 15%

40% + 183 23% 114 20% 70 31%

Rent-to-Income Ratio 

Average 21% 21% 21% 

0% to 40% 459 58% 341 60% 118 53% 

40% to 60% 213 27% 151 26% 63 28%

60% to 70% 102 13% 63 11% 38 17% 

*70% + 22 3% 17 3% 5 2% 

 128 
Evaluation of Mark-to-Market Program Appendix A

Table A3.5 (Continued)

Location Characteristics of Closed Fulls – Market Rent versus Exception Rent 

All Fulls Full at Market 

Fulls at 

Exception Rent

Number Percent Number Percent Number Percent 

Number of Properties 796 572 224 

Number of Units 67596 50311 17285

Proportion of Racial/Ethnic Minorities 

Average 37% 37% 38%

0% to 10% 288 36% 219 38% 69 31%

10% to 25% 127 16% 82 14% 44 20%

25% to 50% 109 14% 75 13% 33 15% 

50% to 75% 84 10% 56 10% 27 12% 

75% + 189 24% 139 24% 50 23% 

Property Characteristics of Closed Fills

Development Size 

Average Number of Units 85 88 78 

Less than 50 units 215 27% 130 23% 85 38% 

50-99 units 339 43% 256 45% 83 37%

100-199 units 199 25% 155 27% 44 20%

200 or more units 42 5% 31 5% 11 5%

Unit Size 

Average number of bedrooms per unit 1.8 1.8 1.8 

Density

Proportion of 3+bedroom units 178 22% 128 22% 50 22%

Occupancy Type 

Family 535 67% 373 65% 162 72% 

Elderly/disabled 261 33% 199 35% 62 28%

Building Type 

High-rise/elevator 185 23% 144 25% 40 18%

Other 611 77% 428 75% 184 82% 

Age

Average 23 23 24

0-20 75 9% 53 9% 22 10% 

20-25 559 70% 430 75% 129 58% 

25-30 69 9% 41 7% 28 13% 

30+ 93 12% 49 9% 44 20%

HUD Program Type 

Older Assisted 192 24% 107 19% 86 38% 

Newer Assisted 604 76% 465 81% 138 62% 

 129 
Evaluation of Mark-to-Market Program Appendix A

Table A3.5 (Continued)

Location Characteristics of Closed Fulls – Market Rent versus Exception Rent

All Fulls Full at Market

Fulls at 

Exception Rent

Number Percent Number Percent Number Percent 

Number of Properties 796 572 224

Number of Units 67596 50311 17285

Mortgage Sponsor Type 

Profit Motivated 481 60% 367 64% 115 51%

Limited Dividend 234 29% 156 27% 78 35% 

Non-Profit 74 9% 44 8% 30 13%

Other 6 1% 5 1% 1 0% 

Mortgage Financed Type 

State HFA Bond Financed 70 9% 51 9% 19 8% 

Other 726 91% 521 91% 205 92%

Most Recent REAC Financial 

Performance Score 

Average 65 66 61 

0-40 67 8% 35 6% 32 14% 

40-60 213 27% 146 25% 68 30% 

60-80 391 49% 298 52% 93 42% 

80+ 124 16% 94 16% 30 14% 

Most Recent REAC Physical Inspection 

Score 

Average 80 81 77 

0-40 3 0% 0 0% 3 1% 

40-60 64 8% 39 7% 24 11%

60-80 283 36% 187 33% 96 43% 

80+ 446 56% 346 60% 100 45%

Per Unit Unpaid Principal Balance (UPB) 

Average $22,567 $23,596 $19,938 

$0-$10,000 105 13% 54 9% 51 23% 

$10,000-$25,000 373 47% 276 48% 97 43% 

$25,000-$35,000 249 31% 185 32% 64 29% 

$35,000+ 70 9% 57 10% 12 6% 

Change in REAC Capital Deficiency

Score 

Decrease or No Change 526 66% 379 66% 147 66%

Increase 270 34% 193 34% 77 34% 

Pre-restructure Sec. 8 Contract Rent to 

FMR Ratio 

Average 133% 132% 136% 

< 80% 9 1% 7 1% 2 1% 

80% to 100% 63 8% 47 8% 15 7% 

100% to 125% 250 31% 186 33% 63 28% 

125% to 150% 287 36% 216 38% 71 32% 

150%+ 188 24% 115 20% 73 32% 

 130 
Evaluation of Mark-to-Market Program Appendix A

Table A3.6 

Tenant Characteristics of Closed Fulls – Market Rent versus Exception Rents 

All Full Full at Market Rent Full at Exception Rent

Number Percent Number Percent Number Percent 

Properties 751 538 72% 213 28%

Units 62,906 46,399 74% 16,507 26%

Length of Residence (years) 

Average 4.43 4.6 4.0 

< 2.5 124 17% 83 15% 41 19% 

2.5 to 5 355 47% 245 46% 110 52% 

5 to 8 234 31% 174 32% 60 28% 

8 + 38 5% 36 7% 2 1% 

Household Size 

Average 2.07 2.1 2.1 

< 1.15 157 21% 118 22% 39 18% 

1.15 to 2 113 15% 73 14% 40 19% 

2 to 2.5 270 36% 191 36% 79 37% 

2.5+ 205 27% 152 28% 53 25% 

Percent Elderly Household 

Average 25% 27% 20% 

0% to 5% 194 26% 131 24% 63 30% 

5% to 20% 289 39% 200 37% 89 42% 

20% to 50% 118 16% 89 17% 29 14% 

50% + 147 20% 115 21% 32 15% 

Percent Disabled Household 

Average 16% 15% 18% 

0% to 5% 114 15% 78 15% 36 17% 

5% to 10% 169 22% 133 25% 36 17% 

10% to 20% 264 35% 196 36% 68 32% 

20% + 200 27% 128 24% 72 34% 

Percent Female-headed Single Parent Household with Children 

Average 29% 29% 29% 

0% to 5% 170 23% 128 24% 42 20% 

5% to 25% 105 14% 72 13% 33 15% 

25% to 50% 365 49% 253 47% 112 53% 

50% + 101 13% 78 15% 23 11% 

Percent Racial/ethnic Minority-headed Household 

Average 50% 50% 51% 

0% to 10% 233 31% 165 31% 68 32% 

10% to 50% 150 20% 113 21% 37 17% 

50% to 80% 75 10% 47 9% 28 13% 

80% + 292 39% 212 39% 80 38% 

 131 
Evaluation of Mark-to-Market Program Appendix A

Table A3.7 

Characteristics of Watch List Versus Other Closed (Fulls and Lites) Properties 

Watch List All Other Closed 

Number Percent Number Percent 

Number of Properties 297 1187

Number of Units 23234 104852

Location 

Census region 

Northeast 60 20% 239 20%

Midwest 105 35% 252 21%

South 90 30% 540 45%

West 42 14% 155 13% 

Metro Location 

Central City 160 54% 486 41% 

Balance of Metro (Suburb) 51 17% 280 24% 

Non-metro 87 29% 421 35% 

Tract Characteristics

Proportion of Vacant Hsg Units 

Average 11% 10%

0% to 5% 55 19% 240 20% 

5% to 10% 107 36% 536 45% 

10% to 20% 109 37% 329 28% 

20% + 26 9% 82 7% 

Homeownership Rate 

Average 48% 52% 

0% to 40% 101 34% 315 26% 

40% to 60% 74 25% 323 27%

60% to 70% 67 23% 286 24%

70% + 55 18% 263 22% 

Poverty Rate 

Average 26% 26%

0% to 10% 46 15% 142 12% 

10% to 20% 73 25% 353 30% 

20% to 30% 77 26% 265 22% 

30% to 40% 51 17% 185 16% 

40% + 50 17% 242 20%

Rent-to-Income Ratio 

Average 22% 21% 

0% to 40% 154 52% 645 54% 

40% to 60% 98 33% 369 31%

60% to 70% 37 12% 139 12%

70% + 9 3% 34 3% 

 132 
Evaluation of Mark-to-Market Program Appendix A

Table A3.7 (Continued)

Characteristics of Watch List Versus Other Closed (Fulls and Lites) Properties 

Watch List All Other Closed 

Number Percent Number Percent 

Number of Properties 297 1187

Number of Units 23234 104852

Percent Minority

Average 41% 38%

0% to 10% 88 30% 288 36%

10% to 25% 48 16% 127 16%

25% to 50% 51 17% 109 14% 

50% to 75% 33 11% 84 10% 

75% + 77 26% 189 24% 

Property Characteristics 

Development Size 

Average Number of Units 78 88 

Less than 50 units 100 34% 299 25% 

50-99 units 119 40% 487 41% 

100-199 units 64 22% 332 28%

200 or more units 14 5% 70 6%

Unit Size 

Average number of bedrooms per unit 1.85 1.78 

Density

Proportion of 3+bedroom units 22% 21%

Occupancy Type 

Family 229 77% 788 66% 

Elderly/disabled 68 23% 399 34% 

Building Type 

High-rise/elevator 66 22% 301 25%

Other 231 78% 886 75%

Age 

Average 25 24 

0-20 27 9% 95 8%

20-25 152 51% 726 61% 

25-30 62 21% 170 14% 

30+ 56 19% 195 16% 

HUD Program Type 

Older Assisted 129 43% 389 33% 

Newer Assisted 168 57% 798 67%

 133 
Evaluation of Mark-to-Market Program Appendix A

Table A3.7 (Continued)

Characteristics of Watch List Versus Other Closed (Fulls and Lites) Properties

Watch List All Other Closed 

Number Percent Number Percent 

Number of Properties 297 1187 

Number of Units 23234 104852 

Mortgage Sponsor Type 

Profit Motivated 150 50% 659 56% 

Limited Dividend 127 43% 394 33% 

Non-Profit 19 6% 127 11% 

Other 1 0% 6 1% 

Mortgage Financed Type 

State HFA Bond Financed 18 6% 80 7% 

Other 279 94% 1107 93% 

REAC Financial Performance Score 

Average 63 68 

0-40 40 14% 82 7% 

40-60 72 24% 265 22% 

60-80 125 42% 561 47% 

80+ 60 20% 280 24% 

REAC Physical Inspection Score 

Average 76 81 

0-40 9 3% 3 0% 

40-60 48 16% 84 7% 

60-80 98 33% 395 33% 

80+ 142 48% 705 59% 

Per Unit Unpaid Principal Balance (UPB) 

Average $19,341 $20,244 

$0-$10,000 84 28% 244 21% 

$10,000-$25,000 123 42% 570 48% 

$25,000-$35,000 60 20% 286 24% 

$35,000+ 30 10% 87 7% 

Change in REAC Capital Deficiency Score 

Decrease or No Change 196 66% 768 65% 

Increase 101 34% 419 35% 

Pre-restructure Sec. 8 Contract Rent to 

FMR Ratio 

Average 122% 128% 

< 80% 6 2% 20 2% 

80% to 100% 39 13% 134 11% 

100% to 125% 139 47% 426 36% 

125% to 150% 79 27% 381 32% 

150%+ 34 11% 226 19% 

 134 
Evaluation of Mark-to-Market Program Appendix A

Table A3.8 

Tenant Characteristics – Watch List Versus Other Closed

Watch List All Other Closed

Number Percent Number Percent 

Number of Properties 570 1135

Number of Units 50733 99,597 

Tenant Data 

Length of Residence (years) 

Average 4.38 4.5 

< 2.5 54 18% 169.0 14% 

2.5 to 5 142 48% 555.4 47% 

5 to 8 89 30% 405.9 34% 

8 + 13 4% 56.7 5% 

Household Size 

Average 2.15 2.0 

< 1.15 51 17% 290.6 24% 

1.15 to 2 53 18% 178.1 15% 

2 to 2.5 87 29% 393.3 33% 

2.5+ 105 35% 317.7 27% 

Percent Elderly Household 

Average 21% 29% 

0% to 5% 92 31% 287.8 24% 

5% to 20% 122 41% 440.8 37% 

20% to 50% 37 12% 164.0 14% 

50% + 45 15% 289.2 24% 

Percent Disabled Household 

Average 14% 15% 

0% to 5% 72 24% 216.8 18% 

5% to 10% 58 20% 267.6 23% 

10% to 20% 103 35% 414.5 35% 

20% + 60 20% 281.9 24% 

Percent Female-headed Single Parent Household with Children

Average 32% 28% 

0% to 5% 54 18% 322.6 27% 

5% to 25% 52 17% 157.4 13% 

25% to 50% 130 44% 531.0 45% 

50% + 55 18% 158.3 13% 

Percent Racial/ethnic Minority-headed Household 

Average 59% 51% 

0% to 10% 59 20% 353.3 30% 

10% to 50% 60 20% 235.4 20% 

50% to 80% 40 13% 120.7 10% 

80% + 138 46% 475.5 40% 

 135 
Evaluation of Mark-to-Market Program Appendix A

Table A3.9 

Property Characteristics – Fulls Versus All Others 

Fulls 

All Others 

Except Opt Out 

and Pipe Line

Number Percent Number Percent 

Number of Properties 796 6,570

Number of Units 67596 690,469

Location 

Census region 

Northeast 168 21% 1,278 19%

Midwest 174 22% 1,911 29%

South 393 49% 2,122 32%

West 60 8% 1,259 19%

Metro Location 

Central City 289 36% 3,439 52% 

Balance of Metro (Suburb) 172 22% 1,796 27% 

Non-metro 335 42% 1,335 20% 

Tract Characteristics 

Proportion of Vacant Hsg Units 

Average 10% 9% 

0% to 5% 135 17% 1,906 29% 

5% to 10% 378 48% 2,747 42% 

10% to 20% 216 27% 1,622 25% 

20% + 66 8% 296 5% 

Homeownership Rate 

Average 54% 47%

0% to 40% 194 24% 2,429 37% 

40% to 60% 187 24% 1,822 28% 

60% to 70% 203 26% 1,193 18% 

70% + 211 27% 1,126 17% 

Poverty Rate

Average 28% 22% 

0% to 10% 73 9% 1,507 23% 

10% to 20% 228 29% 1,978 30% 

20% to 30% 186 23% 1,301 20% 

30% to 40% 125 16% 883 13% 

40% + 183 23% 900 14% 

Rent-to-Income Ratio

Average 21% 22% 

0% to 40% 459 58% 3,214 49% 

40% to 60% 213 27% 2,412 37% 

60% to 70% 102 13% 740 11% 

70% + 22 3% 204 3% 

 136 
Evaluation of Mark-to-Market Program Appendix A

Table A3.9 (Continued)

Property Characteristics – Fulls Versus All Others 

Fulls 

All Others 

Except Opt Out 

and Pipe Line

Number Percent Number Percent 

Number of Properties 796 6,570

Number of Units 67596 690,469

Percent Minority

Average 37% 39% 

0% to 10% 288 36% 2,032 31% 

10% to 25% 127 16% 1,157 18% 

25% to 50% 109 14% 1,131 17%

50% to 75% 84 10% 750 11% 

75% + 189 24% 1,500 23% 

Property Characteristics

Development Size 

Average Number of Units 85 105 

Less than 50 units 215 27% 1,456 22% 

50-99 units 339 43% 2,257 34% 

100-199 units 199 25% 2,151 33% 

200 or more units 42 5% 706 11% 

Unit Size 

Average number of bedrooms per unit 1.84 1.71 

Density

Proportion of 3+bedroom units 22% 19%

Occupancy Type

Family 535 67% 4,554 69% 

Elderly/disabled 261 33% 2,016 31% 

Building Type 

High-rise/elevator 185 23% 1,757 27% 

Other 611 77% 4,813 73% 

Age 

Average 23 26

0-20 75 9% 901 14% 

20-25 559 70% 2,208 34% 

25-30 69 9% 1,807 27% 

30+ 93 12% 1,655 25% 

HUD Program Type

Older Assisted 192 24% 3,683 56% 

Newer Assisted 604 76% 2,887 44% 

 137 
Evaluation of Mark-to-Market Program Appendix A

Table A3.9 (Continued)

Property Characteristics – Fulls Versus All Others

Fulls 

All Others 

Except Opt Out 

and Pipe Line

Number Percent Number Percent 

Number of Properties 796 6,570 

Number of Units 67596 690,469 

Mortgage Sponsor Type 

Profit Motivated 481 60% 2,510 38% 

Limited Dividend 234 29% 2,519 38% 

Non-Profit 74 9% 1,403 21% 

Other 6 1% 139 2% 

Mortgage Financed Type 

State HFA Bond Financed 70 9% 536 8% 

Other 726 91% 6,034 92% 

REAC Financial Performance Score 

Average 65 68 

0-40 67 8% 514 8% 

40-60 213 27% 1,392 21% 

60-80 391 49% 2,954 45% 

80+ 124 16% 1,710 26% 

REAC Physical Inspection Score 

Average 80 81 1% 

0-40 3 0% 67 1% 

40-60 64 8% 467 7% 

60-80 283 36% 2,231 34% 

80+ 446 56% 3,805 58% 

Per Unit Unpaid Principal Balance (UPB) 

Average $22,567 $18,695 

$0-$10,000 105 13% 1,830 28% 

$10,000-$25,000 373 47% 3,046 46% 

$25,000-$35,000 249 31% 978 15% 

$35,000+ 70 9% 716 11% 

Change in REAC Capital Deficiency Score 

Decrease or No Change 526 66% 4,269 65% 

Increase 270 34% 2,302 35% 

Pre-restructure Sec. 8 Contract Rent to 

FMR Ratio 

Average 133% 104% 

< 80% 9 1% 1,611 25% 

80% to 100% 63 8% 1,533 23% 

100% to 125% 250 31% 1,924 29% 

125% to 150% 287 36% 1,005 15% 

150%+ 188 24% 497 8% 

 138 
Evaluation of Mark-to-Market Program Appendix A

Table A3.10

Tenant Characteristics Closed Fulls Versus All Others

Fulls 

All Others 

Except Opt Out 

and Pipe Line

Number Percent Number Percent 

Number of Properties

Number of Units 

Tenant Data 

Length of Residence (years) 

Average 4.43 5.14 

< 2.5 131 17% 547 8% 

2.5 to 5 376 47% 2,815 43% 

5 to 8 248 31% 2,610 40% 

8 + 40 5% 599 9% 

Household Size 

Average 2.07 1.95

< 1.15 166 21% 1,741 26% 

1.15 to 2 120 15% 1,346 20% 

2 to 2.5 286 36% 1,811 28% 

2.5+ 217 27% 1,623 25% 

Percent Elderly Household 

Average 25% 35% 

0% to 5% 205 26% 1,095 17%

5% to 20% 306 38% 2,283 35% 

20% to 50% 125 16% 1,220 19%

50% + 156 20% 1,946 30%

Percent Disabled Household 

Average 16% 13% 

0% to 5% 121 15% 1,670 25% 

5% to 10% 179 22% 1,527 23%

10% to 20% 280 35% 2,103 32%

20% + 212 27% 1,215 18% 

Percent Female-headed Single Parent Household with Children 

Average 29% 24% 

0% to 5% 180 23% 2,060 31%

5% to 25% 112 14% 1,130 17% 

25% to 50% 386 49% 2,625 40% 

50% + 107 13% 688 10% 

Percent Racial/ethnic Minority-headed Household 

Average 50% 53% 

0% to 10% 247 31% 1,621 25% 

10% to 50% 159 20% 1,551 24% 

50% to 80% 79 10% 871 13% 

80% + 310 39% 2,508 38%

 139 
Evaluation of Mark-to-Market Program Appendix A

Table A3.11 

Regression Analysis 

Probability of 

Participation

Probability

of Closing as

Full

Probability

of Exception

Rent

Probability

of Closing as

Watch List

Fulls vs. All 

Others

(Except Opt 

Outs and

Pipeline)

Properties Included 

MtM 

Participants 

and NonParticipants,

excluding

Opt-Outs 

Closed Fulls

and Closed

Lites 

Closed Fulls Closed Fulls,

Closed Lites 

and Watch 

List

Properties

Closed Fulls,

Closed Lites, 

All AOTC 

properties

and nonparticipants,

excluding

Opt-Outs

Dependent Variable

=1 if 

participant 

=0 otherwise

=1 if Full 

=0 if Lite 

=1 if 

Exception

Rent 

=0 if Market

Rent 

=1 if 

Watchlist

=0 if Close

Lite or Full 

=1 if Closed 

Full 

=0 Otherwise 

Number of Properties 7,974 1,187 796 1,484 7,360 

Location 

Census region

Northeast + NS + NS + 

Midwest - + + + - 

South Ref Ref Ref Ref Ref 

West + + + NS NS

Metro Location 

Central City NS + NS + NS

Balance of Metro (Suburb) Ref Ref Ref Ref Ref

Non-metro - NS NS NS NS

Tract Characteristics 

Proportion of Vacant Hsg 

Units NS NS NS NS 

Homeownership Rate + - NS - +

Poverty Rate + - + - + 

Property Characteristics

Development Size - - NS - NS 

Density (Proportion of 

3+bedroom units) + + NS NS + 

Occupancy Type 

Family Ref Ref Ref Ref Ref 

Elderly/disabled - NS NS NS - 

Building Type 

High-rise/elevator NS - Ref NS NS 

Other Ref Ref NS Ref Ref 

Age NS - NS NS - 

 140 
Evaluation of Mark-to-Market Program Appendix A

Table A3.11 (Continued)

Regression Analysis 

Probability of 

Participation 

Probability of 

Closing as

Full 

Probability of 

Exception

Rent 

Probability of 

Closing as

Watch List

Fulls vs. All 

Others 

(Except Opt 

Outs and 

Pipeline) 

Properties Included 

MtM 

Participants 

and NonParticipants, 

excluding

Opt-Outs 

Closed Fulls 

and Closed

Lites 

Closed Fulls Closed Fulls, 

Closed Lites 

and Watch 

List

Properties

Closed Fulls,

Closed Lites, 

All AOTC 

properties

and nonparticipants, 

excluding

Opt-Outs 

Dependent Variable

=1 if 

participant 

=0 otherwise

=1 if Full 

=0 if Lite 

=1 if 

Exception

Rent 

=0 if Market 

Rent 

=1 if 

Watchlist 

=0 if Close

Lite or Full 

=1 if Closed 

Full 

=0 Otherwise 

Number of Properties 7,974 1,187 796 1,484 7,360 

HUD Program Type 

Older Assisted - - + + - 

Newer Assisted Ref Ref Ref Ref Ref 

Mortgage Sponsor Type 

Profit Motivated Ref Ref Ref Ref Ref 

Limited Dividend + NS NS NS NS 

Non-Profit - NS NS NS NS 

Other 

Mortgage Financed Type 

State HFA Bond Financed - NS NS NS - 

Other Ref Ref Ref Ref Ref 

REAC Financial Performance 

Score - - - - - 

REAC Physical Inspection 

Score - - - - NS 

Per Unit Unpaid Principal 

Balance (UPB) - + - NS - 

Change in REAC Capital 

Deficiency Score + + NS NS + 

Pre-restructure Sec. 8 

Contract Rent to FMR Ratio + + + NS + 

 141 
Evaluation of Mark-to-Market Program Appendix B

Appendix B 

 

Comparison of Property Characteristics Based on Total Savings 

This appendix presents tables that compare prope acteristi on total

savings. The tables provide the same information as the tables in Chapter 4, but add 

information on distributions of key variables. 

Tab lso presents results of regression ana t isolates the effects of ea

characteristic on savings, separately for closed Lites and Fulls. For each model the table 

pres he properties included and the dependen le, follow rows show

the effect of each variable. The dependent variable, total savings, is a continuous 

vari Ordinary Least Square Regressi thod is us

OLS regression fits a linear regression line by min g the least red residua

S gorical. When that is the case, one of the 

categories must be excluded as the reference category in order for the regression to 

converge to a unique solution. The largest category is generally chosen as the omit

category for each characteristic and then become ally a refe category.

regression results can be interpreted as the effect on saving relative to having the 

refe haracteristic. The reference category i ed by “RE the table. F

each variable “NS” indicates that the variable was not statistically significant in the 

regression. A “+” indicates the variable had a statistically significant positive effect on 

the probability of having a particular outcome, an dicates a s ically sign t

nega . “NA” indicates that the variable luded in t gression. (

variable closed at market or exception rents is not included in the Lite regression). 

Tables for Chapter 4 

rty char cs based

le A4.3 a lysis tha ch

ents t t variab ed by ing

able, and therefore the s (OLS) on me ed.

imizin squa ls.

ome of the explanatory variables are cate

ted

s essenti rence The

rence c s indicat F” in or

d “-” in tatist ifican

tive effect is not inc he re The

142 
Evaluation of Mark-to-Market Program Appendix B

Factors Affecting Savings for Lite Transactions 

Table A4.1 

Lite

Average Savings = $12,143 

All Lites 

Savings Above

Average 

Savings Below

Average 

Number of Properties 385 147 238

Number of Units 35,870 13,439 22,431

Average Savings $12,143 $22,928 $5,482 

 

Location

Census region 

Northeast $16,292 27% 13%

Midwest $8,036 14% 24%

South $11,391 32% 42%

West $13,575 27% 22%

Metro Location 

Central City $13,358 56% 46% 

Balance of Metro (Suburb) $12,313 29% 27% 

Non-metro $9,219 16% 26%

Neighborhood (Census Tract) Characteristics

Proportion of Vacant Housing Units 

Average 8% 8%

0% to 5% $12,570 35% 27% 

5% to 10% $10,309 34% 46% 

10% to 20% $13,733 28% 24%

20% + $16,412 3% 3% 

Homeownership Rate 

Average 45% 51% 

0% to 40% $13,420 37% 26% 

40% to 60% $11,883 35% 35%

60% to 70% $12,107 18% 24%

70% + $10,048 10% 15% 

Rent-to-Income Ratio

Average 23% 21%

0% to 20% $11,568 44% 50% 

20% to 30% $12,814 42% 39% 

30% to 40% $12,764 11% 8%

40% + $11,020 3% 3%

Proportion of Racial/Ethnic Minorities 

Average 45% 37%

0% to 10% $5,051 29% 34% 

10% to 25% $2,921 15% 19% 

25% to 50% $2,174 14% 13%

50% to 75% $6,718 12% 13%

75% + $10,257 31% 20% 

143 
Evaluation of Mark-to-Market Program Appendix B

Table A4.1 (Continued)

Factors Affecting Savings for Lite Transactions 

Lite

Average Savings = $12,143 

All Lites 

Savings Above

Average 

Savings Below

Average 

Number of Properties 385 147 238

Number of Units 35,870 13,439 22,431

Average Savings $12,143 $22,928 $5,482

Poverty Rate 

Average 25% 23% 

0% to 10% $11,436 15% 19%

10% to 20% $12,416 33% 32% 

20% to 30% $11,012 18% 22% 

30% to 40% $12,750 17% 14%

40% + $13,409 18% 13%

Property Characteristics

Development Size 

Average Number of Units 91 94 

Less than 50 units $13,241 23% 20% 

50-99 units $12,375 39% 37%

100-199 units $11,298 32% 35% 

200 or more units $10,650 7% 7%

Unit Size 

Average number of bedrooms per unit 1.62 1.72 

Density

Proportion of 3+bedroom units 16% 20% 

Occupancy Type 

Family $12,365 62% 66%

Elderly/disabled $11,690 38% 34% 

Building Type

High-rise/elevator $11,557 38% 24%

Other $13,508 62% 76% 

Age 

Average 25.9 26.5 

0-20 $13,093 6% 4% 

20-25 $12,037 43% 42%

25-30 $11,996 27% 26%

30+ $11,762 23% 27% 

HUD Program Type 

Older assisted $11,873 46% 54%

Newer assisted $12,265 54% 46% 

Mortgage Sponsor Type 

Profit Motivated $11,282 47% 45% 

Limited Dividend $11,535 37% 43% 

Non-Profit $14,877 17% 12% 

Other N.A. 0% 0% 

144 
Evaluation of Mark-to-Market Program Appendix B

Table A4.1 (Continued) 

Factors Affecting Savings for Lite Transactions

Lite

Average Savings = $12,143

All Lites 

Savings Above

Average 

Savings Below

Average 

Number of Properties 385 147 238 

Number of Units 35,870 13,439 22,431

Average Savings $12,143 $22,928 $5,482 

Mortgage Financed Type 

State HFA Bond Financed $10,058 2% 3% 

Other $12,199 98% 97% 

Per Unit Unpaid Principal Balance (UPB)

Average $17,556 $14,158 

$0-$10,000 $11,490 31% 38% 

$10,000-$25,000 $11,675 48% 53% 

$25,000-$35,000 $13,229 12% 7% 

$35,000+ $19,688 9% 2% 

Most Recent REAC Financial Performance Score 

Average 72 73 

0-40 $12,335 7% 6% 

40-60 $11,703 16% 16% 

60-80 $10,822 36% 42% 

80+ $12,988 41% 36% 

Most Recent REAC Physical Inspection Score

Average 86 86 

0-40 $5,147 0% 1% 

40-60 $14,022 4% 3% 

60-80 $11,103 18% 22% 

80+ $12,243 78% 75% 

Pre-restructure Sec. 8 Contract Rent to FMR Ratio

Average 129% 113% 

< 100% $7,607 9% 29% 

100% to 125% $11,296 42% 47% 

125% to 150% $15,074 30% 21% 

150%+ $19,054 19% 3% 

Change in REAC Capital Deficiency Score

Decrease or No Change $12,362 65% 60% 

Increase $11,294 35% 40% 

PAE Type 

Public $11,287 39% 45% 

Private $12,785 61% 55% 

Restructuring Type 

Closed at Market Rent $12,143 100% 100% 

Closed at Exception Rent N.A. 0% 0% 

145 
Evaluation of Mark-to-Market Program Appendix B

Table A4.2 

Factors Affecting Savings for Full Transactions 

Full 

Positive Savings

Average Savings = $11,098 

All Full 

Savings

Above

Average 

Savings

Below

Average 

Negative

Savings

(Loss) 

Number of Properties 790 192 361 237

Number of Units 67,065 18,219 30,840 18,006

Average Savings $5,674 $22,480 $5,044 -$6,981 

 

Location

Census region 

Northeast $15,315 47% 17% 7%

Midwest $1,896 9% 24% 28%

South $2,750 32% 53% 59%

West $8,950 12% 6% 6%

Metro Location 

Central City $7,781 44% 34% 32% 

Balance of Metro (Suburb) $8,023 30% 21% 16% 

Non-metro $2,673 26% 45% 52% 

Neighborhood (Census Tract) Characteristics

Proportion of Vacant Housing Units

Average 8% 8% 9%

0% to 5% $10,250 29% 24% 19% 

5% to 10% $4,346 45% 49% 49% 

10% to 20% $4,836 23% 25% 27% 

20% + $7,364 3% 3% 4%

Homeownership Rate 

Average 44% 55% 59% 

0% to 40% $11,235 40% 22% 16% 

40% to 60% $5,100 24% 23% 22% 

60% to 70% $3,345 20% 24% 33%

70% + $3,442 16% 31% 29%

Rent-to-Income Ratio

Average 24% 21% 20%

0% to 20% $3,639 40% 61% 66%

20% to 30% $7,250 35% 24% 24% 

30% to 40% $9,366 19% 13% 9% 

40% + $16,522 7% 2% 1%

Proportion of Racial/Ethnic Minorities

Average 48% 34% 33%

0% to 10% $10,774 32% 40% 34%

10% to 25% $10,061 11% 16% 20% 

25% to 50% $12,698 9% 12% 20% 

50% to 75% $10,533 12% 12% 8% 

75% + $16,071 36% 20% 19%

146 
Evaluation of Mark-to-Market Program Appendix B

Table A4.2 (Continued)

Factors Affecting Savings for Full Transactions 

Full 

Positive Savings

Average Savings = $11,098 

All Full 

Savings

Above

Average 

Savings

Below

Average 

Negative

Savings

(Loss) 

Number of Properties 790 192 361 237

Number of Units 67,065 18,219 30,840 18,006

Average Savings $5,674 $22,480 $5,044 -$6,981 

Poverty Rate 

Average 30% 27% 26%

0% to 10% $4,450 7% 10% 9%

10% to 20% $3,650 23% 29% 34% 

20% to 30% $6,323 23% 25% 22% 

30% to 40% $5,609 18% 14% 16% 

40% + $8,268 30% 21% 19% 

Property Characteristics

Development Size 

Average Number of Units 95 85 76 

Less than 50 units $3,604 26% 24% 33%

50-99 units $5,012 34% 45% 46%

100-199 units $8,101 30% 27% 17%

200 or more units $11,826 9% 4% 4% 

Unit Size 

Average number of bedrooms per unit 1.76 1.80 1.96 

Density 

Proportion of 3+bedroom units 20% 21% 25%

Occupancy Type 

Family $5,492 67% 62% 74%

Elderly/disabled $6,142 33% 38% 26% 

Building Type

High-rise/elevator $3,565 40% 23% 10% 

Other $12,876 60% 77% 90% 

Age 

Average 23.9 23.4 22.6 

0-20 $4,811 9% 9% 10% 

20-25 $4,910 64% 70% 76% 

25-30 $9,651 13% 8% 6%

30+ $7,597 13% 13% 8% 

HUD Program Type

Older assisted $8,222 32% 23% 18%

Newer assisted $4,997 68% 77% 82% 

147 
Evaluation of Mark-to-Market Program Appendix B

Table A4.2 (Continued) 

Factors Affecting Savings for Full Transactions 

Full 

Positive Savings

Average Savings = $11,098 

All Full 

Savings

Above

Average 

Savings

Below

Average 

Negative

Savings

(Loss) 

Number of Properties 790 192 361 237

Number of Units 67,065 18,219 30,840 18,006

Average Savings $5,674 $22,480 $5,044 -$6,981

Mortgage Sponsor Type 

Profit Motivated $3,286 46% 62% 71%

Limited Dividend $10,256 45% 26% 23%

Non-Profit $7,225 9% 12% 6% 

Other $5,432 0% 1% 0% 

Mortgage Financed Type 

State HFA Bond Financed $7,706 11% 9% 8% 

Other $5,477 89% 91% 92% 

Per Unit Unpaid Principal Balance (UPB) 

Average $24,198 $22,022 $22,290 

$0-$10,000 $9,024 17% 13% 10% 

$10,000-$25,000 $3,133 31% 50% 55% 

$25,000-$35,000 $6,631 35% 30% 31% 

$35,000+ $12,165 17% 7% 5% 

Most Recent REAC Financial Performance 

Score 

Average 71 64 55 

0-40 $1,924 10% 12% 24% 

40-60 $2,254 17% 24% 34% 

60-80 $6,604 43% 47% 32% 

80+ $12,106 29% 17% 10% 

Most Recent REAC Physical Inspection Score 

Average 83 83 80 

0-40 $5,840 1% 0% 1% 

40-60 $4,666 8% 9% 9% 

60-80 $5,261 25% 22% 29% 

80+ $6,040 67% 69% 61% 

Pre-restructure Sec. 8 Contract Rent to FMR 

Ratio 

Average 146% 132% 125% 

< 100% $342 4% 8% 14% 

100% to 125% $2,957 20% 34% 38% 

125% to 150% $6,032 37% 37% 34% 

150%+ $11,063 40% 21% 14% 

Change in REAC Capital Deficiency Score 

Decrease or No Change $6,094 66% 66% 66% 

Increase $4,935 34% 34% 34% 

148 
Evaluation of Mark-to-Market Program Appendix B

Table A4.2 (Continued) 

Factors Affecting Savings for Full Transactions

Full 

Positive Savings

Average Savings = $11,098 

All Full

Savings

Above

Average 

Savings

Below

Average 

Negative

Savings

(Loss) 

Number of Properties 790 192 361 237 

Number of Units 67,065 18,219 30,840 18,006 

Average Savings $5,674 $22,480 $5,044 -$6,981 

PAE Type 

Public $3,976 11% 20% 22% 

Private $6,059 89% 80% 78% 

Restructuring Type 

Closed at Market Rent $7,649 80% 81% 52% 

Closed at Exception Rent $652 20% 19% 48% 

149 
Evaluation of Mark-to-Market Program Appendix B

Table A4.3 

Regression Results

Full Regression

Results 

Lite Regression

Results 

Number of Properties 790 385 

Properties Included Closed Fulls Closed Lites 

Dependent Variable Total Savings Total Savings

Location 

Census region 

Northeast NS 

Midwest - -

South Ref Ref 

West + +

Metro Location

Central City NS + 

Balance of Metro (Suburb) Ref Ref

Non-metro - - 

Proportion of Vacant Housing Units - NS

Homeownership Rate - NS

Poverty Rate - NS 

Property Characteristics

Development Size 

Average Number of Units NS NS 

Density + NS 

Proportion of 3+bedroom units 

Occupancy Type 

Family Ref Ref 

Elderly/disabled - - 

Building Type 

High-rise/elevator + NS 

Other Ref Ref 

Age NS NS 

HUD Program Type 

Older assisted + NS 

Newer assisted Ref Ref 

Mortgage Sponsor Type 

Profit Motivated Ref Ref 

Limited Dividend + NS 

Non-Profit NS + 

Other 

Mortgage Financed Type 

State HFA Bond Financed NS - 

Other Ref Ref 

150 
Evaluation of Mark-to-Market Program Appendix B

Table A4.3 (Continue

Regression Results 

d)

Full Regression

Results 

Lite Regression

Results 

Per Unit Unpaid Principal Balance (UPB)- - NS

Most Recent REAC Financial Performance Score + NS

Most Recent REAC Physical Inspection Score + NS

Pre-restructure Sec. 8 Contract Rent to FMR Ratio + + 

Change in REAC Capital Deficiency Score NS NS

PAE Type 

Public + NS

Private Ref Ref

Restructuring Type NA 

Closed at Market Rent Ref 

Closed at Exception Rent -

151 
Evaluation of Mark-to-Market Program Appendix C

Appendix C: Case Studies 

Introduction 

This is the second section of the evaluation of the U.S. Department of Housing and Urban

Development’s (HUD) Mark to Market (M2M) program. It has been prepared by 

Econometrica, Inc., and its subcontractor, Abt Associates, under contract to HUD. In 

2002, HUD’s Office of Policy Development and Research contracted with Econometrica,

Inc., to assess and describe the program’s implementation. This study is the first

ssessment of the program since its inception, and has three components: 

• A process study that includes an analysis of how the program has been 

• A retrospective analysis that provides quantitative information on participation in 

and

tcomes. 

ting at

d.

e n

whi

on all the case study sites, and provides some conclusions based on review of all 15 case 

udies. This section contains the case studies.

The case studies cover a small sample of fifteen purposively selected properties, and 

include information gathered at site visits, and from analyses of data regarding each site. 

(Details on sample selection are presented in Chapter 7.) 

Case Studies were developed for the following M2M properties: 

• College Park Apartments 

 Lancaster, California 

• Eastward Courts 

Casper, Wyoming 

• Fair Park Apartments 

Sardinia, Ohio 

• Genesse Towers 

Utica, New York 

• Kingsley Park 

 Essex, Maryland 

• Lynn Acres 

Shelbyville, Kentucky 

• Murphy Blair Rehab III 

St. Louis, Missouri 

• Myrtle Manor 

 Phoenix, Arizona 

• Russell Erskine Apartments 

Huntsville, Alabama 

• Six Chimneys, Inc. 

Cleveland, Ohio 

• Sneedville Gardens, 

Sneedville, Tennessee 

• Winthrop Apartments 

Tacoma, Washington 

• Valley Heights Apartments 

 Quincy, California 

• Villa Fourteen, 

Ault, Colorado 

• Village Green Apartments 

Red Bay, Alabama

a

administered. 

the program, program costs and savings, efficiency of the M2M process,

program ou

• Case studies developed to present a picture of the program as it was opera

the time the study was conducte

Th first section of the report presents all of the analytical studies and the data upo

ch they are based, including a cross site analysis that presents summary information

st

152 
Evaluation of Mark-to-Market Program Appendix C

During the site visits, project staff interviewed property managers, owners (when 

available), and a sample of tenants. They spoke at length with the PAE underwriter 

responsible for Physical

Assessment Rep available, a

arrative report r ent 

la y,

or l

housing market. Census data and REAC scores were reviewed for information about the 

property, area population, and the local housing market. 

ach case study covers the following topics:

al

dling the

restructuring. 

the restructuring, and reviewed PAE materials including the

ort, the property Appraisal, the Restructuring Plan, and, if

n egarding the property. In some cases Residential Assistance Assessm

P n (RAAP) reports were available and reviewed. Staff of the Public Housing Authorit

other contract administrators, were contacted for data about the property and the loca

E

• A description of the property, its neighborhood, the housing market, and the financi

history of the property. 

• A description of the Participating Administrative Entity (PAE) han

• A discussion of the major milestones in the restructuring process and tenant 

involvement in the M2M process. 

• Details regarding the restructuring including: rent levels pre- and post-M2M, 

estimated savings, financing details, renovation items and their costs, outcomes for

tenants, and viability of the project. 

153
Evaluation of Mark-to-Market Program Appendix C

Case Study One: College Park Apartments 

Lancaster, California—Lite Restructuring 

The Property, Neighborhood, Housing Market, and Financial 

History

ia.

ection 8 New Construction program, and is 

omparable in style to many of the Section 8 properties built at that time. The property 

separate rental office building. The apartment 

ructures are a two-story town house design, with exterior staircases.

rves as a “bedroom community” for nearby Edwards Air Force Base. 

nother major institution in the community is Lancaster Community College, which 

.

ing to 2000 census data, the population of the Lancaster tract where the property

located is 78 percent non-Hispanic white, and 12 percent Hispanic. The poverty rate in

the 200

s

anicured 

ellent

high market value. Directly across the street from the property is a condominium

The Property

The College Park Apartments is an apartment complex located in Lancaster, Californ

The property was built in 1983 under the S

c

contains 60 units in 8 buildings and a

st

Lancaster, California is a community with a population of approximately 120,000 located

in the “high desert” above the San Fernando Valley in Los Angeles County, 70 miles 

from downtown Los Angeles. Traditionally, Lancaster has been known as a retirement 

community. However, in the last 20 years, some light industry has moved into the area, 

and Lancaster se

A

specializes in technical training courses, many of them related to the aircraft industry

Accord

is

0 data is 9.6 percent.

Over the years, the College Park complex has traditionally had close to a 100 percent 

occupancy rate. Turnover normally is about one unit per month, and several of the tenant

have lived at the complex since it opened in 1983. The tenant populations appear to be a

mix of young families, single mothers, and a small percentage of elderly tenants. There 

was no indication that college students had attempted to obtain housing at the facility. 

The common areas of the property are well maintained with large areas of m

lawns and shrubbery. In addition, all the parking areas are also well maintained. The 

Physical Condition Assessment (PCA) noted that the property appeared to be in exc

condition given its age. One week prior to the project site visit, there was a fire that was 

easily contained in a single unit. The Fire Department saw this as evidence of good 

quality construction. 

The Neighborhood 

The neighborhood immediately surrounding the College Park property is mainly one of 

large single family residences. From all appearances, many of these properties have a

154 
Evaluation of Mark-to-Market Program Appendix C

complex. A six-lane road, which is one of the main thoroughfares of Lancaster, ru

along one side of the College Park complex. The co

ns

mplex is located about one-half mile 

om the main campus of Lancaster Community College. As in many southern California 

he Housing Market

here are five multifamily subsidized housing complexes in the community (both Section 

2000 census data

as 64.1 percent. The vacancy rates for both the total housing market and the rental 

r

inancial History of the Project 

The

man

the other

Sec has

een

his anagement. 

ve

he College Park restructuring was handled by ONTRA, Inc., a private PAE located in

Austin, Texas. ONTRA has been supporting government organizations, primarily as an 

underwrite n es, for over 20 years. The company has 

served clients such as the Federal Deposit Insurance Corp, the Federal Savings and Loan 

Insurance Corp. (FSLC), and the Resolution Trust Corp. (RTC). For the past few years 

they have handled restructurings for the M2M program. 

The company is divided into three in-house team ; 2) a 

field specialist team; and 3) an administrative team. The restructure specialist team

develops the plan, handles underwriting, runs underwriting calculations, handles second 

nant meetings, and deals with owner representatives. The field specialists develop the 

market rents, handle comparable assessments, and conduct the first tenant meetings. The 

administrative team works with vendors, performs closings, manages the collection of 

documents for submission to HUD, and handles the post-closing process. 

NTRA has completed about 280 M2M restructurings, of which roughly 80 were Fulls. 

pleted in July 2001, and of the 40 M2M deals currently in 

fr

residential neighborhoods, there are no retail outlets close to the complex. Interviews 

with tenants indicated that most residents do have cars, and the complex is located on a 

bus route. 

T

T

8 and Public Housing). The homeownership rate given for the tract in

w

ma ket were a relatively low 5.4 percent.

F

College Park property is owned and managed by a development and property 

agement group based in Los Angeles. The group has been the owner and manager of 

property since its construction in 1983. The same group owns and operates two

tion 8 multifamily properties in Lancaster. In addition, this management group

b active in developing private sector single family and multifamily residences in the 

Lancaster area. 

T property has consistently received “90” level scores for financial m

Likewise, the maintenance reserve has consistently been maintained at a high per-unit 

le l.

The Participating Administrative Entity (PAE): ONTRA 

T

r a d manager for distressed properti

s: 1) a restructure specialist team

te

O

Their last Lite was com

155 
Evaluation of Mark-to-Market Program Appendix C

progress, virtually all are Fulls. ONTRA operates nationwide, with many of their

ructurings occurring in the Midwest and West. 

ONTRA for almost two years. At the time of this restructuring she wa

rest

The underwriter assigned to coordinate the College Park restructuring has been working 

for s handling four

ther M2M negotiations. The underwriter appeared to be thoroughly familiar with M2M 

procedures a

ng.

and

e independent rent appraisal was submitted to ONTRA on April 14, 2003. It 

estimated market rents below those estimated by the owner’s study. 

The Physical Condition Assessment (PCA) was forwarded to ONTRA on April 15, 

CA found the property to be in good condition. Repairs and maintenance 

items appeared to have been addressed on a timely basis. The PCA found only a 

h

• Painting of a concrete walkway. 

-up paintin

cement of several utility doors. 

ement of 4 chipped sinks. 

ting of wood lan entrances on second

The estimated total cost for these items was $15,300, which the PAE felt could be 

paid out of the cash reserves of the property. 

• On May 23, 2003, ONTRA made a formal recommendation that the College Park 

HAP contract be renewed at the market rent levels established by the independent 

o

nd standard policies.

Milestones in the M2M Restructuring Process 

The following are key milestones in the M2M restructuring process: 

• The College Park property was referred to ONTRA on December 2, 2002, with the 

notice that the owner was requesting a LITE restructuri

• The first major activity in the process was a rent comparability study developed by 

the owner. This study was submitted to the ownership group on January 31, 2003

immediately forwarded to the ONTRA underwriter. After receipt of this 

documentation the ONTRA underwriter identified third party vendors for the 

independent rent comparability study and the Physical Condition Assessment. 

• Th

•

2003. The P

limited number of maintenance items that needed to be addressed within a 12-mont

timeframe. These were: 

• Sealing cracks on paving. 

• Touch g of wooden siding.

• Repla

• Replac

• Repain dings and stories.

rent comparability study. This recommendation was formally approved by OMHAR

on June 6, 2003. 

156 
Evaluation of Mark-to-Market Program Appendix C

• In the case of Lites, of course, there is no formal closing date for a financial 

ing. Rather, after OMHAR’s approval, the property is then referred back to

the local HUD Office of Housing to finalize a new 5-year HAP agreement at the 

, the OMHAR system had not 

received notification that the finalized HAP agreement was in place. 

Tenant Involvement in the M2M Restructuring 

rings. However, in

it tenant feedback (apparently this has become a standard 

se of Lites). On March 23, 2003, the ownership sent a Tenant

esponse Form to all residents at College Park. The form provided instructions to send 

the form directly to ONTRA. Four forms were returned to ONTRA, all of them indicating 

general satisfaction with the management of the property. 

On April 22, 2003, an ONTRA staff person facilitated a tenant meeting. There were 25 

residents at the meeting. Eleven feedback forms were obtained at the meeting, all of 

which indicated general satisfaction with property management. One issue that was 

rought up on several forms was the need for more security. Interviews with tenants oninor thefts (e.g., bicycles) often 

ttributed to residents of a public housing complex about two blocks distant from College 

Park. 

Details of the M2M Restructuring 

Rent Levels 

et levels

stablished by the independent rent comparability study. These levels are provided in 

Tab

restructur

newly established rent levels. As of October 2003

OMHAR’s procedures do not call for tenant meetings in Lite restructu

this case, ONTRA did solic

ONTRA procedure in the ca

R

b

site indicated that this concern was likely due to m

a

The PAE recommended that the rents at College Park be reduced to the mark

e

Table 1 below. 

le 1. PAE-Recommended Rents

Type of Unit Previous HAP Rents New/Market Rents 

Two-Bedroom $798.00 $735.00

Three-Bedroom $869.00 $850.00 

Four-Bedroom $944.00 $900.00

he model used for Lites the PAE does not calculate a Fair Market Rent for a given 

lity.

imated Savings

estimated savings to the government fo

In t

loca

Est

The r this rent restructuring over 20 years were

$563,000.00. This works out to a per-unit savings over the same timeframe of $9,229.50. 

However, in the case of a Lite, it should be noted that the owner has made a commitment 

to keep the property in Section 8 for only 5 years. 

157 
Evaluation of Mark-to-Market Program Appendix C

Financing 

No financing was involved in this Lite restructuring. 

Renovation

No renovation items or costs were associated with this Lite rent restructuring, except as 

he discussion of the Physical Condition Assessment. 

major 

dered taking the

roperty into the private sector.

Lessons Learned from This Site 

ility studies showed generally high rents in

cases of this type,

Items and Costs

noted earlier in t

Outcomes for Tenants 

As indicated above, this has been a well-managed property, located in a fairly up-scale

neighborhood. The level of tenant satisfaction with the property was high. It was a

benefit for the tenants that this property was able to remain in Section 8 with only a 

modest reduction in the subsidized rent levels. If the owner had been required to go to 

Full restructuring there is a possibility that the ownership may have consi

p

Viability of the Project after M2M Restructuring 

Given the history of this property, there is a high degree of confidence that the property

will continue to be maintained at a more than satisfactory level through the course of the 

new 5-year HAP agreement. 

The lessons learned from analysis of the M2M restructuring at this site are: 

• Section 8 rent subsidies at high rates do serve the interests of a low-income

population. In Lancaster, rent comparab

the area. At the same time, there is a considerable low-income population in the 

community. Without the availability of subsidized housing this population would

likely have to resort to sub-standard housing or devote an exceedingly high 

proportion of their income to housing costs. 

• There are cases where M2M type initiatives could lead owners to “opt out” of Section 

8. Of the 15 properties studied for this report, it appeared that most owners would 

have difficulty moving a property to the private sector. However, in the case of 

College Park, a move to the private sector may have been a real option. In any future 

initiatives, HUD may want to consider some level of flexibility in

i.e., a genuine need for affordable housing but also realistic private sector 

opportunities for the Section 8 owners. 

158 
Evaluation of Mark-to-Market Program Appendix C

Case Study Two: Eastward Court Apartments 

Casper, Wyoming—Full Restructuring 

The Property, Neighborhood, Housing Market,

and Financial History

e

oted to farming and large, open cattle ranges. The Casper census 

act containing Eastward Court has an extremely low poverty rate of 7.8 percent. Nearly 

pulation was classified as non-Hispanic white.

tries

st communities of any size are 

ouglas (pop.5, 200) 60 miles away, and Riverton (pop.9, 300) more than 120 miles 

f 32 family units in 9 buildings on a 2.2 

acre lot. There is a separate building containing the laundry facilities and maintenance 

nd.

th units, four are designated as handicapped accessible.

effects of the severe winter weather in Casper, and presented a “worn” look. The asphalt 

laska, Colorado, Montana, Wyoming, and Washington. 

The Property

The Eastward Court Apartment complex is located in the city of Casper, Wyoming, the 

county seat of Natrona County, in the east central portion of Wyoming. According to th

2000 Census, Natrona County has a population of 66,533 with Casper comprising 75 

percent of this number with 49,644 residents. The immediate adjacent portions of

Natrona County are dev

tr

97 percent of the 2000 po

Casper has long served as the service hub for Wyoming’s oil and natural gas indus

(the famous Teapot Dome field is located about 60 miles north of Casper). The oil and 

gas industry is famously cyclical. After a downturn in the late 1990s there has been a 

recent upturn, particularly in natural gas production. Casper also has a relatively large 

service/retail sector with major employers including the Wyoming Medical Center, Boise 

Cascade Office Products and Casper College. The close

D

away. 

The Eastward Court Apartments complex was built in 1981 under the Section 8 New 

Construction program. The property consists o

shed. The property also has a playgrou

The buildings are townhouse-style, two-story wood framed structures with concrete 

foundations. The exterior is a combination of brick veneer and wood siding. Of the 32 

units, 22 are two-bedroom/one-bath units and 10 are three-bedroom/one-bath units. Of 

the 22 two-bedroom/one-ba

At the time of the project site visit the property appeared to be in fairly good condition. 

The lawns and trees were well-maintained. The wood siding and trim suffered from the 

sidewalks and the paved parking lot were in obvious need of repair. 

The management agent for Eastward Court is independent from the ownership of the 

property. This firm has managed the property since 1995, when it took over duties from

the previous company. They currently manage 2,669 units in 65 properties located in 

A

159 
Evaluation of Mark-to-Market Program Appendix C

For the last several years the Eastward Court property has virtually had a 100 percent

level of occupancy. For the last two years, the average time on the waiting list for 

rospective tenants has been between 4 and 6 months. The majority of tenants appear to 

disa

he Eastward Court property sits at the western end of a residential neighborhood of

eyond the office

uildings is open range land running for ten miles to the next ridge of the central 

data indicates a high vacancy rate in the

local rental market. The 2000 census data shows a vacancy rate of 21.4 percent in the 

a “tight”

r,

roperty managers and several other property owners who were present at the property 

during the sit

nership

at 81. All

Th

and Finance Authority (CHFA) 

The Colorado Housing and Finance Authority (CHFA) is a public entity providing a wide 

ran

pro is

obj

p

be single adults, a fair number with children. However, there are also some elderly and 

bled tenants at the property.

The Neighborhood 

T

well-maintained single family residences that appear to be 60 to 70 years old. 

Immediately across the street from the property are several non-subsidized multifamily

apartment buildings. On the street immediately to the west of the property are several 

buildings housing medical offices, and several local service agencies. B

b

Wyoming Mountains. 

The Housing Market 

Although there appears to be a dearth of multifamily properties in Casper (see the 

justification for exception rents below), census

rental market. The census data also indicates a relatively high percentage (59 percent) of 

home ownership in the Eastward Court census tract. This is often an indicator of

rental market, particularly for low income households. 

Tenants were strongly of the opinion that vouchers would be difficult to use in Caspe

especially to obtain units comparable in quality to those at Eastward Court. The on-site 

p

e visit seconded this viewpoint.

Financial History of the Project 

The Eastward Court Apartments complex is currently owned by the Limited Part

th developed the property under the Section 8 New Construction program in 19

past ratings of Eastward Court indicated that financial management was sound and ample

reserves were maintained. 

e Participating Administrative Entity (PAE): Colorado Housing

ge of housing assistance to Colorado residents. The core mission of CHFA is to 

vide affordable housing and business growth opportunities for the State. To meet th

ective CHFA offers (only within Colorado) three main types of financing, namely: 

160 
Evaluation of Mark-to-Market Program Appendix C

• 

ind

• Rental housing loans for new construction and rehabilitation of existing facilities, and 

• the 

The CHFA programs are funded through issuance of taxable or tax exempt bonds and 

from other secured resources. CHFA is not a State agency, and its bonds and notes are 

not obl

support

CHFA e

state th Fort

Collins n

of affor HFA to

rm an affordable housing unit in the late 1990s, and it is this unit that has operated as a 

ecause CHFA issues mortgages within the State of Colorado, it may not administer any 

coo 0 percent of these

structurings have been Lites. At the time of the evaluation, CHFA was handling three 

including development of the M2M model, facilitation of tenant meetings, and closings. 

The fol

• The

• The third party Physical Condition Assessment was completed on January 21, 2003. 

A draft report was submitted to the PAE on February 19, 2003. After some comments 

and

on

• Hou

Ma

inv

uni

add -

term

Home ownership mortgages to qualifying low- and moderate-income Colorado 

ividuals and families. 

the administration of the Low Income Housing Tax Credit (LIHTC) program. 

Commercial loans to locally-owned businesses in Colorado and administration of

Brownfields loan program. 

igations of the State of Colorado and are not repaid with tax dollars. CHFA is selfing and pays all operating expenses from its program revenues. 

has been particularly interested in promoting development in the rural parts of th

at have not shared in the recent “booms” of such urban centers as Denver and

. In addition, because of the explosive growth in such urban areas, the preservatio

dable housing became a focus of the organization. This concern led C

fo

PAE since the inception of the M2M program. 

B

M2M restructurings in the state due to a conflict of interest. To date, CHFA has 

rdinated over 50 restructurings in four other states. Approximately 2

re

restructurings. CHFA staff handles all aspects of the restructuring process in-house, 

Milestones in the M2M Restructuring Process 

lowing are key milestones in the M2M restructuring process: 

Eastward Court Apartments were referred to CHFA in December 2002. 

directives provided by the PAE, the final PCA report was submitted to the PAE

April 29, 2003.

sing Authority personnel also performed a physical review of the property on

rch 24, 2003. The primary maintenance needs noted during the PAE inspection 

olved the property’s exterior siding, parking lots, windows, kitchen cabinets, and 

t floor coverings. PAE staff also believed that the property would benefit from

itional maintenance and office space. All of these items were included in the near

 rehab plan for the property. 

161 
Evaluation of Mark-to-Market Program Appendix C

• 

form concurring with this plan for near- and 

ng-term rehab work was executed on June 6, 2003. 

• The here

was

sinc

com

on it

com

. On March 24, 2003, PAE staff visited the seven

“comp” properties and found that some of the cost figures for these properties 

nts had to pay all utility costs for their units. 

Subsequently, PAE staff gathered additional cost data from the seven properties 

accordingly.

• The first Tenant Meeting was held on March 24, 2003. (See the Tenant Involvement 

section below for details.) 

the PAE

After several minor revisions, the Restructuring Plan was finally approved on August 

ctions in

approval of

Exception Rents. The primary justification for the exception rent levels was the 

amount of annual potential rent necessary to produce, at least, a 1.20 debt service 

coverage ratio. In this case, the determined amount needed was calculated to be 

$231,478.00, which produces a 1.20 Debt Service Ratio using a 5 percent 

vacancy/bad debt rate. 

The main justification for the approval of the Exception Rents on the part of 

OMHAR was a severe shortage of affordable housing for low-income households 

in Casper. The 2000 Census documented that of 20,343 households in Casper, 

8,551 had incomes from $0 to $32,400. The $32,400 figure is the maximum

income limit for residence at Eastward Court. Thus, approximately one-third of 

the households in Casper had incomes that would make them eligible to apply for 

a housing subsidy at Eastward Court. There are seven HUD Section 8 projectbased properties in Casper. All of the properties but one have long waiting lists. 

For the last several years the Eastward Court apartments have had virtually 100 

The owner received notice of the immediate and long-term physical needs of the 

property on June 3, 2003. The owner

lo

PAE had a third party rent comparability study performed in January 2003. T

some difficulty in establishing true “comps” for the Eastward Court property 

e the property has only two- and three-bedroom units. There are virtually no 

parable units in the general Casper area. However, the appraiser did obtain data 

several properties in the Casper area and made adjustments for the differing un

positions. 

This was a comprehensive analysis, however, the PAE had some questions about

details of the analysis provided

were troublesome. For example, the comparability study had not noted that at a 

number of these properties tena

and adjusted the conclusions of the comparability study

• Utilizing the rehab requirements data and the rent comparability analysis,

submitted a draft Restructuring Plan to OMHAR on June 11, 2003. 

•

12, 2003. 

The central feature of the Plan is that, even though there are sharp redu

the HAP rents, the financial viability of the property requires the

162 
Evaluation of Mark-to-Market Program Appendix C

percent occup 2-bedroom unit, and 

up to one year for a 3-bedroom

In addition, a PAE survey indicated an overall occupancy rate of 97 percent in 

re also 75 family 

Public Housing units with an overall occupancy rate of 100 percent and a waiting 

g Authority has been allocated 481

Section 8 vouchers. They currently adm

list of over 80 licants. The PAE

provided by the Exception Rents, the owner mi

y to th te sec s wo an e op iven

needs of the property, but given the “tight” rental market in Casper such a move 

might be finan feasib

MHAR-approved restructuring were presented at a second tenant

Tenant Involvement in the M2M Restructuring 

he first tenant meeting was held at the property on March 24, 2003. Six residents 

nted the restructuring agreement to 

ddress problems in their individual units. 

The on August 22, 2003, was also held at the property, and there

were eight attendees. The residents expressed general satisfaction with the terms of the 

rest

ancy, resulting in a wait of up to 6 months for a

 unit. 

rental properties in the Casper area. In the local area there a

list of 75 individuals. The Casper Housin

inister 500 such vouchers with a waiting 

0 app staff also noted that

e priva

without the funding

ght have an option to move the 

propert tor. Thi uld be expensiv tion, g the rehab

cially le.

• The details of the O

meeting held on August 22, 2003. 

• The restructuring formally closed on September 24, 2003. 

T

attended this meeting. They expressed general satisfaction with the property 

management. Several residents indicated that they wa

a

second tenant meeting,

restructuring agreement. As before, several residents expressed hope that the 

ructuring would address repairs or replacements in individual units. 

163 
Evaluation of Mark-to-Market Program Appendix C

Details of the M2M Restructuring 

Rent Levels 

Table 2 provides the rent levels pre- and post-M2M restructuring.

Table 2. Rent Levels Pre- and Post-M2M

New Contract Rents Previous Contract Rents

Unit Type 

HUDEstablished 

FMRs 

PAE Market 

Rents Rent 

Rent as

Percent 

of FMR Rent 

Rent as 

Percent of 

FMR

Two-Bedroom $519 $400 $582 112% $944 181%

Three-Bedroom $711 $489 $648 91% $1,160 163% 

Estimated Savings 

Based on this rent schedule and project costs, the OMHAR model estimates a total 

savings to the government of $351,295.00 over 20 years of operation. This works out to a 

per-unit savings of $10,332.00.

ent

a

UPB at the end of the 30-year term that is 80 percent of the residual value of the 

property. 

• The new third mortgage was set at $879,172.00 at a 1 percent interest rate and a term

of 30 years. The third mortgage was required since the total amount of the calculated 

Partial Payment of Claim exceeds the principal amount of the second mortgage. 

The Partial Payment of Claim on the existing mortgage was set at $1,424,372.00 on an 

PB of $1,459,448.00.

Renovation Items and Costs 

total of 13 specific items appeared on the short-term rehab list. These items were: 

• Installation of lighting for east side and between buildings: $2,400.00. 

Financing

The restructuring was concluded with the issuance of new first, second, and third 

mortgages. Details of the financing were as follows: 

• The new first mortgage was set at $506,200.00 with an interest rate of 6.60 perc

and a term of 30 years. 

• The new second mortgage was set at $545,200.00 with a 1 percent interest rate and

term of 30 years. The second mortgage was derived by reducing the amount

reasonably expected to be paid, $560,190.00, to a level that would produce a project 

U

A

164 
Evaluation of Mark-to-Market Program Appendix C

• Installation of ceiling-mounted heater in maintenance shop: $200.00. 

• Installation of central air conditioning in the units: $57,600.00. 

• Installation of additional attic ventilation: $6,000.00. 

• Replacement of wood siding with metal siding: $55,000.00. 

• Replacement of windows: $48,000.00. 

• Replacement of broken, heaved, and settled walkways: $24,000.00. 

• Repair of parking lots: $20,000.00. 

• Expansion of existing maintenance shop: $20,000.00. 

• Installation of accessible play structure: $14,000.00. 

• Repair one fire separation unit: $100.00. 

Installation of three video cameras and taping equipment for security: $3,500.00. 

• Replacement of unit furnaces (along with air conditioning): $56,100.00. 

These items represented a total expense of $307,000.00 or $9,593.50 per unit for the 

near-term rehab package. For these items the owner was required to assume 20 percent of 

the costs save for the air conditioning expense. The air conditioning installation was 

deemed to be a “Significant Addition,” and thus the owner’s portion of this cost was only 

percent.

Outcomes for Tenants 

The tenants should receive substantial benefits for the 12-month rehab package. The perunit allowance of nearly $10,000.00 is near the top end of rehabilitation programs. In 

particular, the installation of air conditioning will be a major property enhancement. The 

rehab package also addresses some long standing security concerns of the tenants. 

Perhaps most importantly, the conclusion of the restructuring agreement preserves this 

low-income unit in what is an extremely “tight” rental market in Casper. The use of 

Exception Rents to preserve this low-income property particularly serves tenant needs 

since it has historically been a well-managed and well-maintained property. 

Viability of the Project after M2M Restructuring 

The Exception Rents granted for this property have the express purpose of ensuring the 

viability of this property based on historic expense levels. The long waiting lists at 

Eastward Court would indicate that, at least for the near term, cash flow from rents 

should be more than adequate to maintain operations. Another indication of the likely 

viability of the restructuring is the interest of several entities, both for-profit and nonprofit, to purchase the property once the restructuring was concluded. 

Lessons Learned from This Site 

Lessons learned at this site include the following: 

•

3

165 
Evaluation of Mark-to-Market Program Appendix C

• Exception rents can be a necessary tool in preserving affordable and good quality 

housing in co lds. As

mentioned above ould qualify for

subsidized housing at Eastward Court. Both the private and subsidized rental markets 

are extrem of rental

housing a .) Options

for low-income families in this area are few given the long distances between towns 

yoming, and the low quality of much rural rental housing. The 

of this property ensures that the tenant population can remain reasonably 

k.

mmunities with a high proportion of low-income househo

, approximately one-third of Casper households c

ely “tight.” (In fact, the city of Casper has made the construction

priority in its most recent Community Development Block Grant

and cities in W

preservation

close to schools and employment opportunities. In addition, the quality of the 

Eastward Court property appears superior to much of the private sector rental stoc

• A relatively high investment in the near-term rehab program can still result in 

significant savings for the government. The high per-unit investment at Eastward

Court (nearly $10,000.00 per unit) still ended in an estimate of over $350,000.00 in 

savings over 20 years. This savings was generated at the same time that the shortterm rehab program will bring significant, immediate benefits to the tenant 

population. 

166 
Evaluation of Mark-to-Market Program Appendix C

Case Study Three: Fair Park Apartments

Sardinia, Ohio—Full Restructuring 

The Property, Neighborhood, Housing Market, 

and Financial History

The Property

Fair Park Apartments is a multifamily apartment complex located in Sardinia, Ohio. 

Sardinia is a Village with a population of only 3,000 and is located an hour east of 

Cincinnati. It is in a rural area, but is close to several major highways that provide access 

to neighboring towns and to Cincinnati. Many residents commute to Cincinnati, as 

mployment in Sardinia is very limited. Downtown Sardinia had only 3 blocks of retail 

cated has a non-Hispanic white population of 98.1 percent, a slight drop from 99.4 

-Hispanic black population and the Hispanic population each

8 are

t

room, a galley kitchen, one bedroom, and a bathroom. The two-bedroom units have a 

ving area of 842 square feet, and include a living room, an eat-in kitchen, two 

eet,

th.

nd

The

nds, a laundry facility, and a small management 

e

and commercial businesses, and most are now closed. A train station, churches and 

residential neighborhoods make up the rest of the community. A sign on the road into

Sardinia states that it was the home of the Underground Railroad. 

Census data for 2000 indicate that the population of the census tract in which Sardinia is

lo

percent in 1990. The non

account for only some 0.5 percent of the population. The tenant population of Fair Park 

reflects the racial make-up of the general population, it is all non-Hispanic white. 

The property was constructed in 1981 and consists of three two-story buildings which 

contain a total of 41 units. The one- and two-bedroom units are garden-style, and the

three-bedroom units are designed like townhouses, but share a roof. Of the 41 units,

one-bedroom units, 24 are two-bedroom units, and 9 are three-bedroom units. There are 

two handicap units with bathrooms that have roll-under sinks, wider doorways and grab 

bars. Each unit has sprinklers and a smoke alarm. Only 40 units are covered under the 

current HAP contract, as one of the three-bedroom units is currently rented as a marke

rate unit. 

The one-bedroom units have living areas of 625 square feet. They each contain a living 

li

bedrooms, and one bathroom. The three-bedroom units have a total of 910 square f

with a living room, eat-in kitchen, three bedrooms, one full bathroom, and one half ba

Every apartment has a balcony or patio. All units have an electric forced-air furnace a

central air-conditioning. 

The property includes a parking lot with a total of 61 spaces, or 1.5 spaces per unit.

property also contains two playgrou

office. Overall the property is in good condition. The Property Condition Assessment 

noted that there were no critical or immediate repair needs, and 12-month needs were 

167 
Evaluation of Mark-to-Market Program Appendix C

minimal. Property staff is all part-time, and includes a Property Manager, a maintenanc

employee, and a cleaning employee. 

e

he Neighborhood

perties appear to be well maintained, as are most of the residential properties in 

ardinia. Within walking distance of Fair Parks are a U.S. Post Office, the city 

a

nclude

d on

e major highways close to Sardinia, including the same fast-food chains and strip mall 

shopping seen all over the country. 

rate was

90. Census

ata also indicate that 6.1 percent of housing units in the census tract were vacant in

y rates went up to 6.9

ercent in 2000, from a 5.8 percent rate in 1990. 

s live

istory of the Property

s in the

rocess of trying to secure financing in order to purchase the property. Closing was

expected to o

the other covering

the remaining 8 units. The property manager stated that rents on the 32 units covered by 

T

The property is located close to the center of Sardinia, on one of the few main streets in 

this small town. It is situated in a residential area, and the properties in the immediate 

vicinity are single-family homes that range in age from 20 to 100 years old. A few units 

of manufactured housing are also nearby and sit on relatively large lots. Almost all of 

these pro

S

government office building, a church, a bank, and the Sardinia Elementary School. 

Students must take buses to the Middle School and High School. The closest hospital is

15-minute drive away. 

The handful of retail and commercial businesses remaining in the downtown area i

a restaurant and a bank. Several other businesses are located along the highway into 

town, including a large grocery store and a gas station. Other businesses are locate

th

The Housing Market 

According to Census data, the census tract in which Fair Park is located had a 16.9 

percent poverty rate in 2000, up from 14.4 percent in 1990. The homeownership

76.6 percent in 2000, almost identical with the 76.4 percent census rate for 19

d

2000, a drop from 7.8 percent in 2000. Rental housing vacanc

p

Development of new housing in Sardinia is extremely limited, and many household

in manufactured housing. Fair Park is the only apartment complex in the town. Other 

rental housing is limited to some manufactured housing units, and apartments in houses

that were previously single-family. 

Financial H

The property is owned by Fair Park Associates, an Ohio Limited Partnership. The 

managing general partner is W. Scott Liming. The property manager is Stern-Hendy

Management Company, Inc., a third-party, fee-paid managing agent. At the time the 

M2M process was being conducted, an affiliate of the management company wa

p

ccur in August 2003.

Fair Parks has two HAP contracts in place, one covering 32 units, and

168 
Evaluation of Mark-to-Market Program Appendix C

the first contract were reduced to market rents by HUD several years ago. She did not 

ontracts are not based on unit size, and each contains units of all three sizes.

he original mortgage was in the amount of $1,262,700, with an interest rate of 7.5 

3. According to the Owner’s audited financial 

atement, dated December 31, 2002, the outstanding mortgage balance was $1,022,039, 

and the

(ANOI R

of 0.97

When the PAE first contacted Stern-Hendy regarding the HUD request for an M2M 

review,

reducti

underst

reducti

Chicag

original rent reduction by HUD was not undertaken as part of the M2M program. 

T

Creditexperience handling the due diligence process. Credit-Vest was one of the first 

companies to become a PAE for the M2M program, and it has completed hundreds of 

M2M r

experie

Reaso

The PAE underwriter stated that she believed the owner’s preference for a Lite may have 

een due to a desire to opt out of subsidized housing as soon as possible. The PAE

und

regarding this issue or others once the M2M process was begun. The PAE stated that they 

ssumed the owner felt the recommendations might jeopardize his efforts to secure 

financing and purchase the property. 

The analyst who prepared this study was able to reach the owner’s representative after the 

M2M process was completed. He stated that they chose a Lite simply because they 

wanted the thing to move as quickly as possible. He also said he wanted the property to 

remain

The fol he M2M restructuring process:

know why rents for the other 8 were not reduced, nor did the PAE underwriter. The 

c

T

percent, and was to mature on July 1, 200

st

debt service in 2002 was $104,868. In 2002, the Adjusted Net Operating Income

) reflected on the Owner’s audited statement was $101,793, resulting in a DSC

.

the management company representative explained that because the HUD rent 

on on the 32 units had occurred only a few years ago, it was the owner’s

anding that just the remaining 8 units were to be analyzed in 2003 for market rent 

ons. However, the PAE states that during conversations with the OMHAR

o office, it was decided that rents were to be revised for all 40 units because the

he Participating Administrative Entity (PAE): Credit-Vest 

Vest is a private PAE. It is a large real estate company with a great deal of 

estructurings. The underwriter who handled the Fair Parks deal was very

nced, and was handling some 15 M2Ms during the same time period. 

n Why the Owner Chose a Lite Restructuring 

b

underwriter also stated that she thought the property could succeed without subsidies 

er the right financial circumstance. The owner’s representative did not return calls 

a

subsidized because there is a great need for subsidized units in the area.

Milestones in the M2M Restructuring Process 

lowing are key milestones in t

169 
Evaluation of Mark-to-Market Program Appendix C

The property was referred from the HUD field office to OMHAR in January 2003. 

The PAE sent tenant surveys to management on April 19, 2003, for distribution to 

e received back, representing 15 percent of the units.

The PAE stated that generally the survey results indicated that tenants were 

satisfied with the property, management, and maintenance. 

During the site visit for this study, four tenants were interviewed. They included 

two single mothers each with one child. 

All of these ten in one- ents, and each of the units 

was in very good condition with no observable repair or renovation needs. All of 

the tenants said they were happy livi Park and ha la

ment or maintenan

the ten s unders nything out th pro xcept

irs an enovatio ght occ One t as p that he

kitchen might be updated, the others were content with their units as is, and hoped 

as explained, said they could not find another

apartment in Sardinia, and might try to find an available manufactured housing 

iarity with the voucher program stated 

that she could probably find a unit in a nearby town, but not in Sardinia. 

ase

ns below about the restructuring data and the

PAE’s justification for recommending a Full restructure.) 

al the recommendations, accept a Watch List 

contract, or opt out. In the summer of 2003, the process was begun to place the 

property on the Watch List. 

The Watch List contract was signed in September 2003. At about the same time, 

gent,

•

• The PAE accepted asset assignment in March 2003. 

• Tenant input was provided as follows: 

tenants. Six responses wer

an elderly woman, an elderly man, and

ants were living bedroom apartm

ng at Fair d no comp ints about

manage ce.

None of ant tood a ab e M2M cess, e that

some repa d r ns mi ur. enant w leased r

that repairs would not be disruptive. 

The tenants were asked whether they thought they could find another suitable unit 

nearby if given a housing choice voucher. Three of the four were unfamiliar with 

the voucher program but, when it w

unit. The one tenant who had some famil

• The PAE did not accept justification for a Lite restructuring. Instead they made a c

for a Full restructuring. (See discussio

As all attempts to speak with the owner’s representative had failed, the PAE 

assumed they were going to appe

the purchase deal fell apart. In November, the owner, through the managing a

sent HUD a request for a Full M2M restructuring. The managing agent, who has 

purchased two other properties from this owner, expects to purchase the property

after the M2M is completed. 

170 
Evaluation of Mark-to-Market Program Appendix C

Details of the M2M Restructuring 

There is no restructuring plan for Fair Park. As noted above, the PAE recommended 

E to discuss either

e details of the recommendation, or the option of moving to a Full restructure plan. 

against a Lite restructuring, and the owner refused to speak with the PA

th

Instead of describing a restructuring, this section summarizes the data on rent levels and 

the Physical Condition Assessment data compiled by the PAE. 

Proposed New Rent Levels 

Table 3, developed by the PAE, details the rents under both of the HAP contracts, along 

with a weighted average rent, and the PAE’s concluded market rent. 

Table 3. Rent Levels of HAP Contracts 

HAP Contract 

OH10M000189 

HAP Contract 

OH160019120 

Unit Type 

Number of 

Units Rent 

Number 

of Units Rent 

Weighted 

Average 

Rent 

Concluded

Market Rent

One-Bedroom 6 $406 2 $502 $430 $365

Two-Bedroom 20 $473 4 $578 $491 $500

Three-Bedroom 6 $602 2 $703 $628 $546

The recommended new market rents result in a slight decrease in gross potential rent of

d on May 16,

r item required during the first 12 months was the replacement of windows in 

 include new roofs, bathroom

xtures, pad mounted unit condensers, and new carpeting. It was estimated that the costs 

of these items would total $618,557, or $773 per unit per year, on a non-inflated basis, 

and $746,080, or $933 per unit per year, on an inflated basis using a 2.50 percent 

inflation rate. (In November, the owner’s agent, who had not seen the Restructure Plan, 

approximately $11,304 a year ($942/month,) or some 4.6 percent. The new market rents 

for the one- and three-bedroom units are lower than the existing contract rents under both

of the HAP contracts. However, the rent for the two-bedroom units is slightly higher than 

the larger of the two HAP contract rents. 

Property Condition Assessment Review

A Property Condition Assessment of Fair Park Apartments was complete

2003. The report concluded that the property was in good condition, showing normal 

wear and tear for a 22-year-old property. 

The Assessment did not identify any areas of critical repair affecting life or safety. The 

only repai

10 units at an estimated cost of $5,500. 

The cost of capital items judged necessary in the first five years was some $54,372, or

$1,326 per unit. 

The major repair items anticipated over a 20-year term

fi

171 
Evaluation of Mark-to-Market Program Appendix C

indicated that based o the costs at Fair Park

total some $250,000 to $300,000.) 

PAE Justification for Recommendation of Full Restructure 

The following discussion of the Credit-Vest justification for a Full Restructure is adapted 

from their Narrative Report, supplemented by information from the underwriter. 

The basis for the PAE rejecting a Lite restructure and recommending a Full, was the 

imbalance between the costs of the physical repairs needed and the size of the current 

replacement reserves. Credit-Vest noted that the long-term physical need requirements of 

. As noted 

ated at $54,372 per year. 

These costs could not be funded out of the current replacement reserves of some $43,350, 

and the PAE believed the property would suffer from deferred maintenance unless 

replacement reserves were increased. The PAE noted they did not make any adjustments 

to the 20-Year Replacement Reserve Schedule set out in the assessment report. 

The PAE then considered two scenarios for increasing the replacement reserves. The first 

as to increase the initial deposit to the replacement reserve account by $200,000, thus 

requiring annual deposits of $20,000 ($488/unit), versus the current figure of $4,006 

($100/unit). They calculated that under this scenario, based on the current underwriting, 

the DSCR would decrease from the 2002 number of 0.97, to approximately 0.73. 

In their second scenario, the owner would increase the annual reserve deposit amount 

from the current figure of $4,006 ($100/unit) to $47,770 ($1,165/unit). The DSCR would 

ecrease from 0.97 to approximately 0.47. They noted, however, that this scenario, while 

of

The PAE reiterated that under normal circumstances they would review the reserve 

schedule at length and negotiate with the owner, but this had not occurred. As noted 

earlier, the process was begun in late summer to place the property on the Watch List, the 

Watch List contract was signed in September, and in November the owner requested a 

Full M2M restructure. 

n similar work on another project, he expected

to

the property were heavily concentrated in the earlier years of the 20-year term

above, the costs of repairs over the first 5 years were estim

w

d

not requiring such a large IDRR, results in a potential over-funding of the reserve account

in Year 20 (balance of $656,985 or over $16,000/unit). The PAE did attempt to change 

the timing of some of the items in the 20-year physical needs schedule, but could not 

alleviate the heavy up-front costs; therefore, no adjustments were made. 

The PAE stated that due to the small size of the property, they did not view either

these recommendations as economically beneficial for the property. They did not think 

the property could achieve the 1.20 DSCR required to be approved as a Lite under either 

scenario. 

172 
Evaluation of Mark-to-Market Program Appendix C

Lessons Learned From This Site 

The restructure process for Fair Park has taken a circuitous route from requested Lite, to

rejected Lite and recommended Full, to a Wa h List contract, and now to a request for a

Full restructu een

reduced by HUD a few years ago, and anticipated savings would only be in the range of 

4.6 percent per year or $11,300 a year. Add to this the fact that the owner’s representative 

municated 

ring the restructure assessment, and we have a very atypical M2M 

20

n the other hand, there is no other subsidized housing in the area and if a Lite

t the

in the area, at least

tc

re. Also unusual was the fact that rents on most of the units had b

was attempting to arrange financing and purchase the property and never com

with the PAE du

process. It many never yield lessons that can be applied to other M2M restructurings. 

However, it does raise questions about the way this project has been handled so far, and

highlights a problem in the M2M process that has been noted in other case studies. 

Should Fair Park have been refused a Lite restructure, given how close the rents were to

FMR’s and the small savings ($11,000 annually) that will be realized after a Full 

restructure? Additionally, costs projected for the recommended rehab items appear quite

high: a total of some $600,000 for a short list of items (see Property Condition 

Assessment Review above) for only 40 units. Given these numbers one can assume that

with a Full restructure the government will lose a considerable amount of money over

years. 

O

restructuring had been approved, the owner may well have opted out of Section 8 a

end of the 5-year commitment. Keeping the units subsidized for an additional 15 years 

would seem to be a good outcome. However, it was not the purpose of the PAE in

making its decision. In fact, no one involved in the early stages of the M2M process 

seemed to focus on the difficult decision about the need for the units to remain 

subsidized. Only when a RAAP is prepared is this question considered. 

A peripheral question raised by this case is the way tenants are selected for project-based 

subsidized units. Although Fair Park offers the only subsidized units

one of the tenants interviewed for this study seemed not to need subsidized housing. She 

stated that prior to coming to Fair Park she had sold her home and came to the project 

because she did not want to move out of Sardinia or into manufactured housing. 

Because the Property Manager keeps her own waiting list, people can be chosen because

they will make good tenants rather than because they have the greatest need. This 

situation is not unusual. 

173 
Evaluation of Mark-to-Market Program Appendix C

Case Study Four: Genesse Towers 

Utica, New York—Full Restructuring 

st 

r 2000

rcent

panic. Tenants in the project reflect the racial 

ake-up of the general population and are elderly, handicapped, or mentally/ 

m, commercial kitchen, and 

anagement office, and the mezzanine serves as a library. In the basement are a laundry 

n

ave a living/kitchen/sleeping area and a

athroom. The one bedroom units average 460 sq. ft., and have a small bedroom in 

e Pullmannts set along one wall, consisting of a storage closet, refrigerator, 9-inch 

ide sink, and a small stove. There is no counter space, which combined with the small 

reparation and clean-up very difficult. Staff at the Utica Housing 

uthority believes that the small size of the efficiency units is one of the two reasons the 

le

The Property, Neighborhood, Housing Market, 

and Financial History

The Property

Genesse Towers is a 66-unit project for the elderly and handicapped located in Utica, a 

city in central New York State. According to Census data, the population of Utica was

60,651 in 2000. Historically, the area depended on manufacturing jobs that, for the mo

part, are no longer available. Current unemployment is 7.3 percent, and Census data for 

2000 indicate that the poverty rate was 24.5 percent. According to the PAE assessment, 

there will be no substantial job growth in the foreseeable future. Census data fo

showed racial characteristics for Utica as 76.5 percent non-Hispanic white, 12.4 pe

non-Hispanic black, and 5.8 percent His

m

developmentally impaired. 

The project is an 11-story, narrow brick structure that was built in 1920 as a bank 

building on the main street in Utica. The building was gut-rehabilitated in 1981 by the 

current owner. The first floor consists of a dining roo

m

room and storage bins for tenants. The 66 units take up the remaining 9 floors of the 

building, with 6 to 7 units per floor. There are 49 studios, and 17 one-bedroom units. A 

parking lot to the rear of the building is used by management, although the land on which 

it sits is a separate parcel of land belonging to the property’s owner. 

Genesse Towers has some seven different apartment configurations due to differences i

the original floor plans. The units are relatively small, but adequate for one tenant. 

Efficiencies are 338 sq. ft., on average, and h

b

addition to a living/kitchen area and a bath. The kitchens in all of the units ar

type arrangeme

w

sink size, makes meal p

A

building has some problems attracting and retaining tenants. (The other reason is 

location, which is discussed below.) 

Seven units are partially handicapped-accessible and those doorways, sinks and toilets 

have been adapted. However, the showers are not the roll-in type needed by most 

handicapped individuals. Furthermore, the assessment report states that “routes availab

to tenants partially comply with handicapped accessible requirements.” This seems 

174 
Evaluation of Mark-to-Market Program Appendix C

inadequate in a building that had been approved for congregate housing, and continu

house many residents who are elderly and/or physically handicapped. 

The REAC score given the property in 1999 was 86, and in 200l the score was 96. T

building is clean and well maintained. The Physical A

es to

he

ssessment found no outstanding 

ode violations, and the heating, plumbing and electrical systems were found to be in 

um

ng room were 

clean, and the latter is pleasant looking. These rooms are used daily because lunch is 

on-residents, at a nominal price, by a non-profit organization. 

There is a sitting area across the front of the dining area with a large window looking out 

l

codes and HUD requirements. However, given the height of the building, and the age and 

the

mon 

or

nits, perhaps due to inadequate wiring or

surance costs. The Physical Assessment Report noted the need for upgrades to the air 

was

. All of the buildings in 

e area appear to have been built prior to WWII. On each side of the project there are 

two three-story buildings with retail space on the ground floor and mostly vacant 

commercial space on the top floors. Directly next door is the National Long Distance 

Racing Museum, which was established some 10 years ago in the hopes of bringing new 

c

good working order. All the windows were replaced in 1993 with double pane alumin

units that are still in very good condition. The roof was replaced several years ago, and

the outside of the building was totally scraped and re-painted in 2001. 

An inspection of the property was conducted in July 2003 as part of this study, and the

following observations were made. The kitchen and the social area/dini

served for residents and n

to the street. The area is up a few steps, but there is no ramp for those who use 

wheelchairs or walkers. The other common areas and the hallways throughout the 

building are clean, but need repainting. 

The hallways, public areas, and basement areas have sprinkler systems, but the 

apartments and stairwells do not. This arrangement apparently meets applicable loca

condition of the residents, it would seem prudent to extend the sprinkler system into

units. This was not noted in the Assessment Report. 

The units and hallways have no air conditioning, and the cooling system for the com

area is not adequate to keep the space cool on very warm days. The day the inspection f

this study was conducted, it was miserably hot virtually everywhere in the building. None 

of the inspected units had more than one window, and some tenants had propped their 

doors open with fans to try to improve air flow. There appeared to be some prohibition 

against individual window air-conditioning u

in

conditioner for the social area/dining room. 

The property is managed by an identity-of-interest company, Buck Property 

Management. 

The Neighborhood 

The project is located on the main street in Utica, in an area that is mainly commercial, 

with industrial remnants. The area is zoned “Commercial Highway” and a variance

needed to allow the building to be used as a multifamily residence

th

175 
Evaluation of Mark-to-Market Program Appendix C

life to the area. That has not happened. The rest of the block includes a strip bar, an 

ppliance repair shop, a

.4

.7

000

’s

using Authority has 243 elderly units, and administers 174 Housing Choice 

ouchers. The city government administers an additional 880 vouchers in a program

e 

ts

t. For the handicapped, the likelihood of finding a unit is much lower. 

here are very few handicapped-accessible rental units in Utica, and the public housing

The e

A

a liquor store, and an empty commercial storefront. To the rear of 

the building are the project’s parking lot and a block of very old, virtually empty, 

buildings. Within a few blocks are a small, low-rise public housing project, several 

neglected lots, and the bridge leading out of the city. 

In general, the area has a neglected, deserted feel to it, and the immediate few blocks

provide no retail shopping or recreation opportunities for residents. Several blocks up 

Genesse Street, the area becomes better maintained with city government offices, 

commercial buildings and some retail businesses. Residents can find convenience 

shopping, a drug store and banks in this area. A bus that stops less than a block away 

from the project provides residents with transportation up to this area. 

The Housing Market 

According to Census data, the census tract in which Genesse Towers is located had a 44

percent poverty rate in 2000. The 2000 homeownership rate in the tract was only 29

percent. Census data also indicate that the total housing vacancy rate for the tract in 2

was 17.5 percent, and the rental vacancy rate was 7.3 percent. The housing stock is very 

old, and much of it is in poor condition. The appraisal stated that 73.3 percent of Utica

housing was built before 1949 and that much of it is in disrepair and/or abandoned. 

The Ho

V

transferred to them by the HUD Buffalo Area Office some years ago. The average tim

on the waiting list for public housing is between 1 and 1.5 years. Elderly applican

usually prefer help in place and, thus, prefer a voucher. Staff for the city stated that the 

success rate for displaced elderly in finding a suitable unit with a housing choice voucher 

is 50 percent, at bes

T

program has only some 13 accessible units. 

Therefore, if tenants of Genesse Towers were given vouchers and told to find another 

unit, they would have great difficulty. Some tenants could probably be placed in one of 

the two other elderly/handicapped projects owned by the same partnership. If tenants 

could not find suitable rental units, the Housing Authority could eventually absorb many 

into the public housing program, but it would take considerable time as there is no 

preference for displaced persons. 

PAE Case Memo indicated that the HUD Buffalo Area Office, the Appraiser and th

P E all agreed that the project offered one of the best housing options in Utica for

elderly tenants, and was worth preserving as subsidized housing. 

176 
Evaluation of Mark-to-Market Program Appendix C

Financial History of the Project 

The building is owned by a limited partnership, the Genesse Towers Redevelopment

which includes the principal owner Richard Buck, his wife Kathryn Buck, the Richa

Buck Cons

Co.,

rd M.

truction Co., and the Buck Property Management Company. The property was 

purchased in 1980 by the partnership for $1 for each of the two parcels. In September of 

e Federally-assisted mortgage on the property is outstanding. In 

ddition, the developer was to pay 3.6 percent of the “gross sheltered rents,” but only

after subtracting fro $58,300.

tion of housing

lderly tenants. Presumably that is why approval was given for the very small kitchens in 

rehab,

e owner was approved to receive funds under the Congregated Housing Services

the

tena

som ces. The

PHA staff interviewed did not know anything about this situation. In fact, many of the 

y

task

M2

vac arlier,

e that it takes effort by management to keep occupancy 

In 1

out

own

the Senior Property Manager. The owner has 11 other properties, all subsidized, and 8 of 

em as of August 2003. The owner stated, through her Senior 

g

The Property Manager also stated that they entered the M2M Program

al

NW

two

and

the

M2 d

that year, the city of Utica entered into a tax-exempt agreement with the partnership 

under which city, county, and school taxes would be paid only on the assessed value of 

the property at the time the agreement was signed, or $58,300. The exemption remains in

effect as long as th

a

m that figure the amount in taxes already paid on the

The project was financed under the 221(d) (4) program, with the inten

e

the units, and the commercial kitchen and dining room. Upon completion of the

th

Program. However, according to the Senior Property Manager, the needs of both

nts and the general population changed gradually through the 1980’s. As a result, at

e point in the late 1980’s, the project stopped providing congregate servi

current residents appear to need social service support and/or some assistance with dail

s.

The HAP contract, which was to expire in June of 2003 but was extended during the 

M process, set rents at 189 percent of FMR. The Project Manager advertises

ancies in a variety of community papers and social service centers. As noted e

th PHA Contract Manger believes

up at this property. 

998 the project was refinanced, and the interest rate was dropped to 6.5 percent. The

standing principal balance on the mortgage was $1,690,613 in August 2003. The 

er is elderly and ill, and his wife runs the business with considerable assistance from

th were in the M2M program

Property Manager, that she and her husband entered the subsidized rental market in order

to et business for their construction company and to provide housing for those in need. 

 under duress. 

The Participating Administrative Entity (PAE): NW Financi

Financial is a private PAE located in Jersey City, New Jersey. It is structured with

working groups. The first has been in operation since 1996, and does public finance

advisory work for municipalities, primarily bond work. The second working group is

M2M group, which has been in operation since 2001. The firm originally got into 

M work as a Teaming Partner with a large PAE. Currently, the M2M group is staffe

177 
Evaluation of Mark-to-Market Program Appendix C

wit

Eac e

tota

han s Housing Authority opted out of the M2M

rogram.) 

The underwriter who was assigned the Genesse Tower project has been with NW for 2.5 

years. This was one of the first restructurings assigned to him. He was handling 12 Fulls 

at the time he was working on Genesse Towers. The Managing Director also worked on 

this restructuring. 

Milestones in the M2M Restructuring 

The following are key milestones in the M2M restructuring process: 

• NW

• Res

upc

of b

• The nt Involvement 

Section below for details about the meeting.) 

• , this

002. The

was

e were already

questioning and debating the PAE regarding many items in the restructure plan. As 

noted earlier, the owners did not want to become involved in a restructuring. The 

h a Managing Director, four underwriters, two closing coordinators and support staff. 

h underwriter was working on some 10 to 15 active files in the summer of 2003. Th

l number of active files at that time was 82, with 7 Lites and 75 Fulls. (One was 

ded to them when the Massachusett

p

 Financial accepted assignment of Genesse Towers on March 14, 2002. 

idents were notified on March 25, 2002 about the M2M program and the 

oming meeting. The Notice to Tenants written by the PAE was very clear and free 

ureaucratic jargon. It was posted on tenants’ doors by management. 

first tenant meeting was held on April 18, 2002. (See the Tena

Due diligence was completed on May 23, 2002. According to the underwriter

was not difficult as the project is bond-financed and the owner had all of the 

necessary paperwork available. 

• The Physical Needs Assessment was completed on September 8, 2

assessment was prepared by a firm of construction and building consultants that is 

frequently hired by NW to prepare these reports. No significant deferred maintenance

needs were reported, but certain building components were found to have limited 

remaining life, and immediate repair or replacement was recommended for a few 

items. 

• The report noted that a market-driven improvement, renovation of the kitchens,

required. The desirability of a second elevator was also mentioned, but not 

categorized as required. 

• The PAE submitted a Restructure Plan to OMHAR on November 8, 2002. The 

Underwriter stated that the process had been slowed down during the summer by two 

factors. First, the Senior Project Manager for the property, who was the owner’s 

representative throughout the deal, underwent surgery and was unavailable for more 

than six weeks. More significantly, the owner and her representativ

178 
Evaluation of Mark-to-Market Program Appendix C

restructure plan set exception rents at 136.3 percent of FMR’s, a decrease of some 2

percent from those in the current HAP contract. The owners were very concern

about the lowered rental income, and due to their age, did not view the long-term tax

advantages as an offsetting factor. 

8

ed

The second tenant meeting was held on November 12, 2002. (See the Tenant 

ith the

ny items, 

including: real estate taxes, property insurance and liability, utilities and garbage 

Additionally, they claimed to have virtually no funds available for upfront rehab 

ts for

ts be paid for by the

owner. The owners felt the kitchens should be categorized as significant 

writer was copied on the

response. The first appeal covered seven categories, the most important of which are 

) Kitchen Renovations—The Property Manager stated that the owners could not afford 

the agreement. She 

rgued that the work was a significant addition, rather than a repair and stated that the

owners could

ab

) Real Estate Taxes—The figure set in the Restructure Plan was $12,217 annually, based 

et

ng that

•

Involvement Section below for details.) 

• OMHAR approved a Restructure Plan on February 26, 2003. This followed a series 

of detailed and somewhat acrimonious negotiations. The owners disagreed w

figures used to calculate the underwritten vacancy rate and the costs for ma

removal, salaries and benefits, operating repairs and maintenance, and the 

underwritten vacancy rate. 

costs. The most contentious discussions involved the financing arrangemen

the renovation of the kitchens. The Restructuring Agreement categorized the 

kitchen renovations as a market-driven improvement to an existing item and, as is

typical in the program, required that 20 percent of the cos

additions, which require only a 3 percent owner contribution. 

• First Appeal by Owner—March 28, 2003; OMHAR Response—June 9, 2003. The 

appeal letter was sent to Donna Rosen, the Portfolio Director at OMHAR in 

Washington, DC. Sue Shinderman, the Relationship Manager, was involved in the 

appeal review as well. Dawn Robertson, Senior Under

described below, along with the OMHAR response to each item.

1

to pay the 20 percent of the rehab costs, some $36,000, as required in

a

afford the 3 percent contribution that is required.

OMHAR Response—The renovation was not reclassified as a significant addition. 

However, the decision stated that because of the extent of the work to be done, the 

Restructure Plan was being modified to include one-half of the kitchen work in the reh

escrow, and half in the 2nd year of the replacement reserve. 

2

on the OMHAR reading of the old PILOT Tax Agreement which, as noted earlier, had s

the assessed value of the property at $58,300. Management presented data indicati

the current assessment on which taxes were being paid was $515,332. 

179 
Evaluation of Mark-to-Market Program Appendix C

OMHAR Response—OMHAR increased the real estate tax figure to $25,180 annually

f the

estructuring Commitment. 

arrived at by applying an

MHAR-approved formula to current costs. Management argued that the figures were 

xpense adjustments were allowed. 

’s

of the

First, that “the kitchens be added in the 1st and 2nd years (of the replacement 

eserves), enabling the work to be done in a timely manner, yet not financially bankrupt 

nse

MHAR Response—OMHAR again declined to categorize the kitchen improvements as 

as

riter for NW explained the M2M program and asked 

tenants to express any concerns they had about the program, and to make general 

comments about the property and management. Tenants expressed no concerns about the 

program, and indicated that they were happy with the property and the management. 

Some cited the difficulty of finding affordable senior housing in the area. 

based on the figures presented. However, they went on to note that the town’s tax 

liabilities and billings were not in conformance with the PILOT Agreement and would 

have to be clarified prior to closing. The clarification was made a condition o

R

3) Benefits—The figures set in the Restructure Agreement were

O

artificially low and would require cutting down on numbers of staff, and hours worked, 

for maintenance and support staff. They asked for an additional three full-time 

employees, as well as higher salary and expense figures in several categories. 

OMHAR Response—OMHAR added costs for three full-time employees and a 

painting/cleaning crew. Bookkeeping service costs were set at a $3.35PUPM per the 

Buffalo office guidelines. No additional salary or e

• Second Owner Appeal—July, 2003. Within a week of receiving the OMHAR 

response, the Property Manager requested an Administrative Review by OMHAR

Director of Underwriting and Finance. Subjects to be appealed were: funding

kitchen renovation costs and calculation of real estate taxes. 

Regarding the kitchen work, the Property Manager proposed that one of two plans be 

approved.

r

the owner.” Or second, as requested earlier, that the work be classified as a Significant 

Addition, not a repair. The telephone appeal was conducted in July 2003, and a respo

was forthcoming within the 20-day required time period. 

O

a significant addition, or to make any other changes to their first decision. 

• The closing was expected to occur at the end of November 2003. 

Tenant Involvement in the M2M Restructuring 

The first tenant meeting was held on April 18, 2003, in the community/dining room at the

property. Participants included the Senior Property Manager, the Site Manager, two 

underwriters from NW Financial Group, and the Contract Administrator for the Utica 

Municipal Housing Authority. The New York State Outreach and Training Grantee w

notified, but did not send a representative. Eight tenants attended the meeting. 

At the meeting, the senior underw

180 
Evaluation of Mark-to-Market Program Appendix C

he two project-relate hens, and security

nts explained the difficulty of cooking without counter space, and cleaning 

p in the 9-inch sinks. Some said they had to wash pots and pans in the tub. 

ecurity after regular daytime hours was the second concern raised by tenants. They 

the weekends.

The second tenant meeting was held on Novemb i

notices for tenants on doors. Eight tenants attende e underwriter

property manager s and Neighb

org ttended ll. Ten ere in

restructuring, and what the PAE was recomm reg nov . The

re dicat t she w elp te in c ten aniza

enants did not raise any new issues or concerns.

espite the very good efforts by the PAE to involve tenants in the process, the level of

ive tenants were interviewed for this study in June 2003. The interviews took place in

the dining room and the Property Manager was not present. With one exception, the 

nants who came to be interviewed were not those picked randomly by the interviewer 

from the tenant list prior to the site visit. 

How

in which they most wanted to see changes were the same mentioned by tenants at the 

eetings—kitchens and security. Difficulty getting into the very old mailboxes was also 

n d to

mo

ou ur tenants were generally satisfied with the property and

or look for another unit if they were given a housing choice voucher. As noted above, one 

na y waiting for a voucher. One other replied that she would look for

er she would be able to find one. Two tenants said

was unsure. The tenants rated management as good, 

and maintenance as good to fair. 

T d issues raised by tenants were inadequate kitc

concerns. Tena

u

S

wanted a security guard on duty all night and on

er 12, 2002. Aga

d, as did th

tate Tenant

n, management posted 

their

. A representa

as we

and the

tive of the N ors

ants w

ew York S

anization a formed about the status of the 

ending arding re ations tenant

presentative in ed tha ould h nants reating a ant org tion.

T

D

tenant involvement was quite low. With regard to their impact on the process, it was 

limited to recommendations regarding staffing and physical improvements at the 

property. The security issue they raised may well not have been mentioned or addressed 

without their input, and money for added security personnel was included in the 

restructure plan. The renovation of the kitchens had already been raised by the Property 

Manager. 

F

te

None of the tenants interviewed had any real understanding of the M2M program. 

ever, four were aware that improvements might be made at the property. The areas 

m

me tioned. One tenant indicated that because her apartment was very small she wante

ve, with or without improvements. She was on the waiting list for a housing choice 

v cher. Three of the other fo

their units. The tenants were asked whether they would choose to remain at the property 

te nt was alread

another unit, but was unsure wheth

they would choose to stay, and one

181 
Evaluation of Mark-to-Market Program Appendix C

Details of the M2M Restructuring

able 4 provides the rent levels pre- and post-M2M restructuring.

Rent Levels 

T

Table 4: Rent Levels Pre- and Post-M2M 

New Rents Current Contract Rents

Unit Type 

HUDEstablished 

FMRs 

PAE Market 

Rents Exception 

Rent 

Exception 

Rent as 

Percent of 

FMR Rent 

Rent as 

Percent of

FMR

Zero-Bedroom $338 $400 $476 141.2% $707 189%

One-Bedroom $400 $475 $565 141.2% $799 189% 

Estimated Savings 

tals, is $1,717,362. As a result, the 20-years savings to HUD will be $700,442. Of

course, increases in costs at higher-than-projected levels, and the resulting higher rents, 

ould reduce the savin roject might well be 

A first mortgage in the amount of $482,000, insured under Sec. 223(a)(7), or Sec. 

• $320,000: Kitchen upgrades. 

• $100,000: Added security on weekends and holidays. 

• $100,000: Apartment floors (over ten years). 

Savings to the Section 8 payments for the initial year of the new HAP Contract have been 

estimated by the PAE at $183,564. The present value amount of that savings over 20 

years would be $2,116,378. However, the mortgage restructuring payment, or write-down 

to

w gs. A potential cause of higher costs in this p

higher energy costs. 

Financing 

The terms of the mortgage under the restructuring as of November 1, 2003, include: 

•

221(d)(4), and amortized over 30 years at a rate of 6.50 percent, plus a 0.50 percent 

MIP. 

• A second mortgage in the amount of $801,585, amortized over 30 years, with an 

interest rate of 1 percent. 

• A third mortgage, a HUD-held Contingent Repayment Mortgage Note in the amount 

of $915,776. 

Renovation Items and Costs 

The renovation items and costs are as follows: 

182 
Evaluation of Mark-to-Market Program Appendix C

• $65,000: Elevator Upgrade (year 5). 

• $198,000: Bathroo

• $30,000: Exteri

• $28,000: Refrigerators (over 10 years). 

The commitm of

$215,000 and annual R4R dep

Tenants

tchen

eased security.

re

s

circumstances 

nd tenant groups

ore, it would appear that tenant 

on

y

m Fixtures (years 2-5). 

or Paint (year 7).

ent requires an initial deposit to Reserve for Replacement (R4R)

osits of $34,450.

Outcomes for

The primary benefit for current and future tenants from this restructuring is that the 

project will remain subsidized with a new 30-year commitment. Additionally, the 

renovations and repairs will be of considerable benefit to tenants, particularly the ki

renovations and incr

Viability of the Project after M2M Restructuring 

The PAE believes that the prospects are good at Genessse Towers for long-term viability. 

The rents, although lower than pre-M2M rents, are still exception rents. The expanded 

kitchen facilities will make it easier to keep the project fully occupied. 

Lessons Learned from This Site 

Two lessons can be taken away from this site. The first has to do with the timing of the

process and OMHAR requirements. An owner can slow down the restructure process 

considerably with detailed analyses of, and arguments about, each item in the Restructu

Plan. These delays are legitimate, but basically are out of the control of the PAE. Perhap

some adjustments to PAE timing requirements should be considered in

like these. 

The second lesson has to do with tenant participation. In this project only 10 and then 8 

tenants attended the tenant meetings, despite the fact that the PAE had done a very good

job of writing a clear letter, attaching a survey, and contacting PHA a

about the meeting. The method for notifying tenants that was chosen by management was 

to place the notices on tenants’ doors, as was done at many other sites. Perhaps this 

method should be replaced by a requirement to the effect that some 10 days before the 

meeting the notices are to be put into tenant mailboxes, as well as posted prominently in 

several designated places around the property. Furtherm

comments are often most useful in the areas of management and maintenance at the 

project, and needed renovations. Although property staff can be asked to leave the tenant

meeting during certain discussions, this does not always occur. Perhaps the informati

would be more forthright if tenants were interviewed individually, or in small groups, b

PAE staff after the tenant meeting. 

183 
Evaluation of Mark-to-Market Program Appendix C

Case Study Five: Kingsley Park 

Essex, Maryland—Full Restructuring 

The Property, Neighborhood, Housing Market, 

and Financial History

The Property

8

he property consists of one- and two-bedroom units in two-story garden-style buildings. 

ercent of the units. Rehabilitation at that time 

moved asbestos hazards, added gabled roofs, replaced kitchen cabinets and counters, 

d privately owned. They are in dramatically deteriorated condition 

.g., no grass, broken windows), in contrast to Kingsley Park, which is rated in fair to 

se

newed.

eral

er of low-income housing and has taken 

part in recent redevelopment projects under the HOPE VI program. 

The Baltimore County Housing Department uses Kingsley Park as transitional housing 

for people who get on the waiting list for a voucher. They are told they can occupy a unit 

Kingsley Park is a 312-unit development that was built in 1943 under HUD’s Section 60

mortgage insurance program and served as WWII military housing. It is located several 

miles from downtown Baltimore, in an older suburban community called Essex, in 

Baltimore County. 

T

There are four units in each entryway, two on each floor. Unit sizes are very small—686 

sq. ft. for the two-bedroom units, and 640 sq. ft. for the one-bedroom units. The 

development consists of two long streets forming an elongated U, with the two-bedroom

units on one street and the one-bedroom units on the other. There is a playground at the 

end of the “U,” in front of a screen of trees at the property’s boundary, but no community 

facilities on site. The property is pleasant, with green lawns and beautiful trees shading 

the sidewalks. 

In 1988, the property came under the Section 8 Moderate Rehabilitation program, and 

HAP contracts were attached to 100 p

re

and replaced windows. A portion of the heating system was replaced. 

A small portion (12 units) of the one-bedroom structures that were part of the original 

1943 property remaine

(e

good condition by the M2M Program’s Physical Needs Assessment. 

The Baltimore County PHA, the Housing Department of the Department of Social 

Services, has administered the Section 8 contract since 1988. This is important, becau

County officials have asserted throughout the M2M process that they have the authority

to decide whether the HAP contracts will be re

The Moderate Rehabilitation developer is the current owner of the property, the gen

partner for a limited partnership called Kingsley Park Associates. She also manages 

Kingsley Park, through an identity-of-interest management company, Landex 

Corporation. The owner is a seasoned develop

184 
Evaluation of Mark-to-Market Program Appendix C

in Kingsley Park while they are waiting for their turn to receive a tenant-based voucher.

ot all residents come to Kingsley Park this way. Some choose the development directly, 

as temporary housing until a tenant-based voucher 

becomes available, Housing Department staff appear to have been sending to Kingsley 

eless 

Kingsley

ng

y

o

d Landex has

ad to accept the stream of tenants referred by that office in order to keep the property 

rted

ree white, non-Hispanic single mothers, two 

frican American single mothers, one near-elderly African American woman, and one 

rty.

wo of

es no security patrols.

pinion that the drug problem could be solved as part of a 

development in which the County would cede ownership of the public streets to the 

N

because they know about it from friends or respond to newspaper ads. 

Kingsley Park has a very high turnover rate for an assisted housing development. 

According to the owner, and rent roll data in the appraisal, it may be as high as 40 percent 

per year. The Landex regional manager and the on-site manager both said that the 

turnover rate resulted from families getting their voucher and moving on. 

In addition to using Kingsley Park

Park people who they believe will not be attractive to private owners immediately (e.g., 

until they have been lease compliant tenants for some period of time). Two of the people

we interviewed said that their last address before Kingsley Park had been in a hom

shelter, and two appeared to suffer from chronic mental illness. 

According to one observer, the owner/manager could have resisted the use of

Park as transitional housing, but chose not to do so. Issuing vouchers to families who

have already been placed in Mod Rehab developments is an unusual practice, as housing 

authorities usually take such families off the voucher waiting list. In addition, accordi

to this observer, Landex did not do the tenant screening that is an owner responsibilit

under the Mod Rehab program. Another observer, however, said that the owner had n

choice because the County Housing Department controls the waiting list an

h

occupied. The owner also says that efforts to evict problem tenants have been thwa

by the County Housing Department. 

Kingsley Park has a mixed-race, multi-ethnic resident population. Among those 

interviewed during the site visit were th

A

young Hispanic man. 

Kingsley Park appears to provide a reasonably safe living environment during the day, 

but at night there is an open-air drug market on the street that runs through the prope

In late spring, Baltimore County stationed police cars on the property every night. T

the residents we interviewed complained about this, saying that they felt this level of 

police surveillance was invading their privacy. Because of constraints on the operating 

budget, Landex provid

PAE staff expressed the o

re

property. The site configuration would make it easy to turn Kingsley Park into a gated 

community without much additional fencing. 

185 
Evaluation of Mark-to-Market Program Appendix C

The Neighborhood 

The census tract had a high poverty rate in 2000, 30 percent, but the rate was dow

36 percent in 1990. Because

n from

Kingsley Park has 500-600 residents, most of whom have 

comes below the poverty level, the continued high poverty rate of the census tract is 

rcent

ainly 

ulation.

he homeownership rate declined slightly between the 1990 and 2000 censuses, from 28 

rty (not connected by a through-street), there are 

ngle-family detached houses under construction, which are expected to sell for 

e

hus, it appears that the immediate Kingsley Park neighborhood is “gentrifying,” as 

e

t

, for eminent 

domain takings. The referendum was defeated, but debate over it did not focus on 

Census data for 2000 indicate that the total vacancy rate for the tract was 9.9 percent, an 

increase from 6.7 percent in 1990. The rental vacancy rate in 2000 was 8.3 percent, a 

slight increase from 1990. While Baltimore County appears to have a fair amount of 

rental housing that could be afforded with a voucher, both the tenants we interviewed and 

other observers believe that there is substantial resistance by owners of rental housing in 

in

attributable in part to the continued existence of the development itself. According to the

2000 census, the Kingsley Park census tract is 57 percent non-Hispanic white, 33 pe

black, 3 percent Hispanic, 2 percent Asian, and 5 percent multi-racial. Observation 

during the site visit suggested that the streets around the development have a m

white, non-Hispanic pop

T

to 24 percent. On one side of the prope

si

$200,000-300,000. On the next side (again, with no through-street) is an older singlefamily neighborhood with a wide mixture of housing ages and sizes, including some large

new houses. On the third side is a main road with various commercial uses. The 

neighborhood behind the road has well kept, modest brick townhouses, probably built in 

the 1960s, and a large, new elementary school. On the fourth side, across a street from th

project, there is a large wooded parcel of land that is used as a park. This had been the 

site of an assisted multifamily development, Tall Trees, which was taken by the County

through either eminent domain or a tax foreclosure and demolished. The former site of 

the Tall Trees development is heavily wooded and currently used as a park. 

T

affordable multifamily developments are retired from use (in addition to Tall Trees,

another assisted multifamily project has been redeveloped) and as new mid-market 

homeownership units are built. Several neighborhood residents told us that schools in th

neighborhood have a good reputation. 

According to both the developer and County officials, the County’s objectives are to 

eliminate dense multifamily rental housing and to create a neighborhood primarily of 

homeowners. At some time in the past few years, the County put Kingsley Park on a lis

of properties for which it sought voter approval, through a referendum

Kingsley Park. County officials continue to assert that the continued operation of the 

development with its current size and resident income restrictions is detrimental to health

of the neighborhood. 

The Housing Market 

186 
Evaluation of Mark-to-Market Program Appendix C

the County to accepting families with vouchers, including racially motivated resistance. 

enants told us that they believed that they could easily use vouchers in Baltimore City, 

or perhaps in other suburban counties, but not in the neighborhood immediately 

surrounding Kingsley Park. 

Without a Rental Housing Assessment Plan (RAAP), we have no detail on numbers and 

locations of vouchers in use in Baltimore County and locations of other affordable 

housing units. (See below. As of October 2003, there was no RAAP. OMHAR reports 

at processing has been put on hold several times by senior HUD officials as 

ancial restructuring, is in serious financial distress. In 2003, the

owner hired a Washington, DC law firm with a large housing practice to help make the 

tain

illion FHA mortgage, but let other payables accumulate ($400,000 as of June 2003) and 

trimmed expe te 2003,

ortly after

ally increasing in

lu ld be able to find a buyer for the property at a

ic $10 million FHA-insured mortgage. Thus, a 

simple opt-out of the Section 8 contract was never a feasible option. 

The property’s REAC inspection scores have varied: 61 in 1999, 79 in 2000, 69 in 2001, 

and 89 in 2002. Despite the 89 score in December 2002, HUD conducted another REAC 

inspection in October 2003. This was in response to tenant complaints that, the owner 

believes, were instigated by County officials as part of an effort to force her to default on 

her FHA-insured mortgage and abandon Kingsley Park.24 

 

T

th

negotiations continue.) 

Financial History of the Project 

In 1995 or 1996, the Housing Department stopped providing annual adjustments to the 

HAP contracts based on a market comparability study. The third-party appraisal suggests 

that the rents are still above market, but only by 4 to 7 percent: $594, compared to $570, 

for one-bedroom units, and $686, compared to $640, for two-bedroom units. In effect, the 

property has been gradually reduced toward market rents over a period of several years 

and, in the absence of fin

case that the rules of the Moderate Rehabilitation program permit a development to re

the ratio between market and HAP rents originally agreed to. It is not clear why she did 

not do this earlier. 

The owner continued to pay debt service of close to $1 million annually on the $10 

m

nditures on maintenance and security. OMHAR reports that in la

sh the study period ended, the owner’s mortgage payments stopped.

In the view of the owner of Kingsley Park, the neighborhood is gradu

va e, but not to the point where she wou

pr e that would enable her to pay off the

24 The study team does not know the result of the 2003 REAC inspection. 

187 
Evaluation of Mark-to-Market Program Appendix C

The Participating Administrative Entity (PAE): First Housing 

HUD referred Kingsley Park to First Housing, a private PAE located in Florida. First 

Housing’s M2M staff joined the company in 1999, when the company’s role as a PAE 

egan. First Housing’s earlier (and other current) business appears to be largely as a

ency, underwriting HFA loans and doing

IHTC compliance. The company also provides bridge financing for FHA multifamily 

ucturings, more than three quarters of which 

ave been Fulls. The company currently has about 32 M2M deals in progress. The 

ral

eals,

hich are heavily rural and southern, and the highly politicized nature of this deal, which 

iscussions within HUD and between HUD staff and the other 

akeholders to be confidential. The PAE has had to wait for the directions that result 

n the Kingsley Park restructuring, since this is a “problem deal.” She 

elieves that First Housing has handled Kingsley Park well, under difficult

he following are key milestones in the M2M restructuring process: 

Failed attempt at prospective M2M. 

ccording to the owner, she would have been willing to go into the M2M process three 

t nowhere with either HUD or the County, but in retrospect may not have pushed 

ard enough. In November 2002, she submitted a formal request to the Baltimore County 

b

contractor to the Florida Housing Finance Ag

L

loans. 

First Housing has completed 150 M2M restr

h

underwriter in charge of Kingsley Park has been with the company for several years and

was handling about 12 cases in the summer of 2003. She was very responsive to requests 

for information during the study period. However, she has been challenged by seve

factors: her distance from the events (e.g., not being able to join meetings on Kingsley 

Park in person), the differences between Kingsley Park and other First Housing d

w

has required many of the d

st

from these discussions. 

The OMHAR relationship manager for all of the First Housing M2M deals has been 

actively involved i

b

circumstances. The owner agrees. Her opinion is that M2M is fundamentally a good 

program and that First Housing has done well the job defined for it under the program. 

Milestones in the M2M Restructuring Process 

T

•

A

years before the HAP contracts began to expire in March 2003. In February 2000, she 

convened a meeting that included representatives of the County, the State, and the 

Baltimore HUD field office, in order to plan for the future of the development. She says

she go

h

Housing Department, as the HAP contract administrator, to enter the M2M program.

According to the owner, the Housing Department did not forward a signed copy of the 

request to OMHAR until February 2003. 

• Notice to tenants of HAP contract expiration. 

188 
Evaluation of Mark-to-Market Program Appendix C

In March 2002, Landex gave notice to the residents that the contract expiration date was a

year away. According to Landex staff, this did not mean that the owner intended to take 

the property out of the Section 8 program. Rather, the letter sent and posted was simply

the letter required by HUD. 

• Start of M2M process—referral to PAE. 

February 2003, OMHAR assigned Kingsley Park to First Housing.

d

rm

ss

-year extension of the HAP contracts while the process is under way.

e property as “average,”

ompared with market rate apartments in the area. Rents were found to be above market 

Marketriven needs include air conditioning, carpeting, exhaust fans in kitchens, vanities in

5.

to

le way within a reasonable time period. At the same time, the HUD officials 

pointed out that the owner of a Moderate Rehabilitation development, like other Section 8 

In

• Short-term extension of HAP contracts. 

In March 2003, the owner and the Housing Department signed extensions that continue

all contracts through the expiration date of the last cohort, August 31, 2003. According to 

the owner, she had a “gun to her head.” She either had to agree to this very short-te

extension of the contracts or immediately begin losing HAP payments. The M2M proce

envisions a one

• PAE’s Due diligence. 

The PAE completed the third party appraisal on March 31, 2003. The appraisal rated the 

maintenance of the property as “adequate” and the appeal of th

c

by 4 to 7 percent. 

The Physical Needs Assessment was completed on April 2, 2003 and found $4,765 per 

unit in immediate (12-month) repair needs and market-driven capital needs, and $9,727 

per unit in estimated capital needs (adjusted for inflation) over the next 20 years.

d

bathrooms, and an upgrade of the electrical system. 

The audited financials and bond documents from the owner were received April 1

• PAE submission of a restructure plan to OMHAR. 

Following the completion of due diligence, the PAE underwriter began entering data in

an underwriting model for Kingsley Park. Then, during the summer of 2003, the PAE

waited while the owner, the County, and HUD negotiated about the future of Kingsley

Park. 

The County’s position was that the Housing Department would not extend the HAP 

contracts beyond August 31 without assurance that the property would be transformed in 

an acceptab

owners, has a unilateral right to a HAP contract extension, unless denied for cause. 

189 
Evaluation of Mark-to-Market Program Appendix C

The owner developed a conceptual development plan for Kingsley Park and circulated it 

on June 25. The plan would have demolished about half the Kingsley Park buildings and 

turned the remaining buildings into 75 two- and three-bedroom townhouses by cutting 

ship

to

nits would be financed by the Low Income Housing Tax 

redit, and occupants would have incomes below the Tax Credit limit of 60 percent of 

the

eportedly, by the end of the summer, the owner and the County had agreed in principle 

uld

e” restructure plan for a M2M deal

nder which all 312 units would continue as project-based Section 8 and without

wner, in the meanwhile, told HUD that her default option was to proceed with a 

straightforwa -based

ection 8. He the number 

d

erwriting model to develop a baseline plan. 

he underwriting model showed that mortgage restructuring, together with some level of 

exception rents, would make it feasible to take care of the property’s capital needs as 

additional stairways. On the land cleared by demolition, she would build 45 

homeownership units. Through-streets would be cut to the road on which the park 

replacing the former Tall Trees development is located, and some of the homeowner

units would face the park. 

The homeownership units would sell for approximately $150,000 and would be sold

first-time homebuyers with incomes below 80 percent (or possibly 115 percent) of area 

median income. The 75 rental u

C

area median income. There would be no project-based Section 8 subsidies attached to

units. Working households with tenant-based Housing Choice Vouchers would be 

eligible to live in the rental townhouses, which would have market rents ranging from

$530 to $690. 

The feasibility of this redevelopment plan evidently would have depended upon an 

allocation of Tax Credits from the State, but the owner was unable to apply for the Tax

Credit during 2003 because of the uncertainty about whether a redevelopment plan could

be devised that was acceptable to both the County and HUD. 

R

to a redevelopment plan that would have retained only 60 rental units, and these wo

have been rent-to-own units. As of November, the owner and the County were discussing

a redevelopment plan that would include 50 market-rate, single-family homeownership 

units and a 100-unit building for occupancy by low-income elderly households. 

During the summer, OMHAR first instructed the PAE Housing to stop work on Kingsley 

Park and then asked the PAE to develop a “baselin

u

additional funds. According to both the PAE and the OMHAR relationship manager, 

retaining only 60 rental units is unacceptable under an OMHAR M2M restructuring, 

although OMHAR would agree to some reduction below the current 312 units and would 

not necessarily insist that the rental units have project-based Section 8 assistance. The 

o

rd M2M restructuring plan that would retain 312 units of project

S r preference is to redevelop the property, reducing substantially

of affordable rental units on the site, and she continued to make that clear to County 

officials. However, her overwhelming motivation appears to be to stop operating the 

property with a negative cash flow and to avoid defaulting on the property’s FHA-insure

mortgage. 

By October 2003, the PAE had used the und

T

190 
Evaluation of Mark-to-Market Program Appendix C

identified by the Physical Condition Assessment and would provide enough cash flow to 

operate the property. 

The owner told the study team that she had seen the “baseline” restructuring plan and 

considers it fair. She does not believe Kingsley Park should continue as 312 very sm

rental units with attached Sect

all 

ion 8 subsidies, because she considers mixed income

ousing as developed under the HOPE VI program a superior program model. However, 

ooperation with the police

epartment, she would be able to provide sufficient security to expel the nighttime drug 

ed assisted

of

to

st 

s of November 2003, an editorial about Kingsley Park had appeared in the Baltimore 

ure of

.

ment in the M2M Restructuring

The PAE conducted a gsley Park on April

4, 2003. About 40 resident adults were present, as were representatives of the on-site

ting

ther relocation will be needed and, if it is, whether relocated

ouseholds will succeed in using vouchers.

h

she says that she could operate the property successfully if the “baseline” restructuring 

plan were to go forward. For example, she says that, in c

d

market from the development. 

As of early November 2003, a Rental Housing Assessment Plan (RAAP) had not yet 

been developed as part of the restructure plan. According to PAE staff, they were waiting 

for the County to make its case for why retaining Kingsley Park as project-bas

housing is not necessary. 

The County waited until the last minute before extending the HAP contracts beyond 

August 31 and then extended them only through November 30, 2003. The owner had 

written to the County and HUD, asserting her legal right to an extension of the contracts 

for the full year contemplated by the M2M process, but agreed once again to a short-term

extension rather than litigating. 

At any point during the M2M process, the HUD field office could have taken over 

administration of the HAP contracts or reassigned them to another entity. In the view

one observer, this action will be needed sooner or later if the M2M process is to move

a successful conclusion. However, the OMHAR relationship manager explained that 

HUD is reluctant to move against the County, believing that, regardless of who 

administers the HAP, the County is a stakeholder in the future of Kingsley Park and mu

agree to any restructuring or redevelopment plan. 

A

Sun, and the County, the owner, and county councilmen representing Essex had turned to 

one of Maryland’s U.S. Senators for help in bringing about an agreement for the fut

the development that did not include the continuation of any type of Section 8 subsidy

Tenant Involve

first tenant meeting at a church adjacent to Kin

1

management office and Legal Aid. According to PAE staff, issues raised at the mee

included complaints about the difficulty of controlling the heat level in the units and 

concerns about whe

h

191 
Evaluation of Mark-to-Market Program Appendix C

In March 2003, as required by HUD, the management company (Landex) sent and posted 

additional notices that the HAP contracts would expire on August 31, 2003. The 

altimore County Housing Office then invited residents to come to the church to pick up 

they

vou

n June 13, Legal Aid held a meeting at the church to attempt to organize the residents of 

Wh the site visit, later in the day on June 13, all residents with whom we 

oke were aware that something was going on that would affect the future of Kingsley 

the voucher waiting list and were

disappointed that they were not receiving a voucher immediately. Others wanted to stay 

so. The assistant manager of Kingsley Park, who was present at the interviews, assured 

y Park with their voucher. She seemed to 

be unaware of redevelopment plans under discussion at that time th te all

of the one-bedroom units herefore, e for tho y for

a one-bedroom unit to live at Kingsle

All of the residents with we spok ted to n Baltim ounty or ve

to counties where they d land of desi nits wou

same

ing as a “Section 8.” She thought she was about to receive something that would be 

more attractive to Baltimore County landlords. Reasons cited for wanting to live in the 

County included good schools, low crime, and “peace and quiet.” Almost everyone 

complained about the nightly drug market and accompanying noise at Kingsley Park. 

When encouraged to describe rehabilitation needed at Kingsley Park, residents mentioned 

improvements to the playground and new mailboxes. One resident mentioned that, 

because of the old piping, water is rusty when it first comes out of the faucet. Several 

mentioned the small size of the units, but it had not occurred to them that this was 

something that could be altered. 

Details of the M2M Restructuring 

ble

B

their voucher packets, on June 6, 2003. However, when residents arrived at the church, 

were told that “everything was on hold” and that they would not receive their

cher packets at that time. 

O

Kingsley Park around the future of the redevelopment. 

en we conducted

sp

Park. They did not recall the April 14 meeting, but knew about the June 6 happenings, 

about the Legal Aid meeting that morning, or both. Few tenants with whom we spoke had

been at any of the meetings. Some were on

at Kingsley Park and were concerned about whether a voucher would permit them to do 

people that they would be able to stay in Kingsle

at would elimina

and, t se qualifying onl

continue to

make it impossibl

y Park.

whom e wan stay i ore C to mo

other suburban believe lords rable u ld be

more willing to rent to voucher holders. None wanted to move “back” into Baltimore 

City. One woman was unaware that a Housing Choice Voucher is essentially the

th

As of early November 2003, Kingsley Park had not reached the stage of OMHAR 

approval of a restructure plan, and the future of the development was uncertain. Possible 

outcomes include: 

• HUD/OMHAR, the County, and the owner may reach a compromise on a 

redevelopment plan that includes more than 60 but fewer than 312 units of afforda

192 
Evaluation of Mark-to-Market Program Appendix C

rental housing—either project-based assisted rental housing or rental units affordabl

for households with vouchers. 

e

HUD/OMHAR and the owner may go ahead with the “baseline” restructuring plan, 

ign

the outcome is the adoption, in essence, of the “baseline” restructuring plan, the future 

Rs

•

retaining all 312 units as project-based assisted housing. This scenario may require

HUD to withdraw the HAP contract from the County Housing Department and ass

it to another HAP contract administrator. 

• The owner may default on the FHA mortgage. In this case, the rules affecting 

mortgage assignment and, possibly, property disposition would be overlaid on the 

M2M process. 

If

Kingsley Park will have exception rents but, probably, rents that remain below the FM

for the Housing Choice Voucher program. 

Table 5 presents the proposed rent adjustments contained in the draft Restructuring Plan. 

Table 5. Rent Levels Pre- and Post-M2M 

Market Rents* Previous Rents 

Unit Type 

HUDEstablished 

FMRs Rent 

Rent as 

Percent of 

FMR Rent 

Rent as 

Percent of 

FMR 

One-Bedroom $691 $570 82% $594 86%

Two-Bedroom $844 $640 76% $686 81%

*Market rents from the third-party appraisal. The study team has not seen the baseline restructuring plan

prepared for OMHAR by the PAE and does not know the level of exception rents it would require. 

he restructuring plan that would retain all 312 units as project-based assisted housing

en

the

Lessons Learned From This Site 

T

and provide for the development’s short-term and 20-year capital needs would result in a 

substantial cost to the Federal government as calculated under the M2M program. 

Because the rents for the property had already been “marked down” almost to market as 

the County Housing Department provided no rent increases between 1995 and 2003, ev

without the need for exception rents there would have been little room for Section 8 

savings to offset the loss to the FHA Fund from the restructured mortgage. However, 

without a mortgage restructuring it is highly likely that the owner will default on

FHA-insured mortgage. 

The key issue is whether Kingsley Park is needed as project-based affordable rental 

housing. County officials claim that revitalization of Essex as a community must include 

redevelopment and lower density for Kingsley Park. It is not clear whether this view is

justified. It could be argued that elimination of affordable rental housing in this

community has already gone far enough. It appears that Kingsley Park, despite the 

problems of the current development, is not standing in the way of investment in the 

193 
Evaluation of Mark-to-Market Program Appendix C

neighborhood by existing homeowners or developers of market rate housing. The drug 

market at Kingsley Park might be eliminated by gating the community or by increasing

security in other ways. 

On the other hand, the development concentrates 312 households with extremely low 

comes in a development that is physically somewhat isolated from the surrounding 

community. Some downsizing may be appropriate, and it might be possible to create a 

mixed income community on the Kingsley Park site that, together with tenant-based 

housing vouchers used elsewhere in the county, does a good job of meeting the needs of 

extremely low-income renters in general. There might be a few residents whose special 

needs would create challenges for relocation with vouchers and who would not meet the 

occupancy requirements of a redeveloped Kingsley Park. 

The M2M process does not appear to be structured to help resolve these issues. The 

Rental Housing Assessment Plan (RAAP) is intended to provide information on whether 

the development needs to be retained as project-based rental housing or whether an 

equivalent number of Housing Choice Vouchers would play the same role in meeting the 

community’s housing needs. However, a RAAP was not produced early enough in the 

process to inform these judgments, nor is it clear that the RAAP that is specified by the 

M2M process will include all of the information needed. 

Another lesson from the M2M process for Kingsley Park is that the M2M program is not 

structured as well as it might be to handle properties that need substantial redevelopment 

that would depend on “additional funds” such as the Low Income Housing Tax Credit. 

There have been many M2M deals closed that involve additional funds. However, unless 

the redevelopment plan can be produced and agreed to by all parties at the very outset of 

the process, it is very difficult to coordinate the timing of the M2M restructure plan and 

the applications for LIHTC or other additional funds. 

Furthermore, this story has some missing characters. No developer other than the current 

owner (for example, a preservation-minded national non-profit) has become involved in 

an attempt to preserve Kingsley Park as affordable rental housing or to redevelop it in a 

way that retains a substantial affordable component. This may be because the need for 

continuation of Kingsley Park as affordable rental housing is ambiguous. It also may be 

that the high degree of political controversy around the future of Kingsley Park makes 

other entities hesitate to take it on. Or it may be that the information flow about 

properties reaching the end of their Section 8 contracts is not sufficiently developed for 

the future of Kingsley Park to have become a subject of wider interest. 

The original concept for the M2M program envisioned the Outreach and Training 

Grantees helping to determine the future of assisted housing developments. In the case of 

Kingsley Park, the Outreach and Training Grant grantee (statewide Legal Aid) reportedly 

was stretched too thin to play this role. The Baltimore County Legal Aid organization 

became involved some months into the M2M process. Its staff appeared quite 

knowledgeable about what was going on at Kingsley Park. However, Legal Aid staff 

observed that many of the tenants want to use vouchers to move away from Kingsley 

in

194 
Evaluation of Mark-to-Market Program Appendix C

Park, having come to Kingsley Park in the first place thinking of it as a starting point on 

the way to something better. Legal Aid staff members were concentrating on trying to 

provide accurate information to the current residents. They were not able to comment on 

the broader issue of whether Kingsley Park is needed as part of the overall housing 

affordability strategy for Baltimore County. 

195 
Evaluation of Mark-to-Market Program Appendix C

Case Study Six: Lynne Acres 

Shelbyville, Kentucky—Full Restructuring 

perty, Neighborhood, Financial History, 

and Housing Market 

ears. Data from the U.S. 

epartment of Labor’s Bureau of Labor Statistics show that the city had an 

was

ction 8 contract administrator for the property. 

ssessment rated the property as good or fair along all 

imensions examined. The building was rated fair in most aspects of code compliance 

d

l 

te

good condition. The

uilding exterior is brick and both the exterior walls and roofs appeared to be in good

d on the exterior staircases to

upper floor apartments. 

ent had 

d

improved and trash was being removed more quickly. Tenants also said that a swing set 

The Pro

The Property

Lynne Acres is a 40-unit family property located in Shelbyville, Kentucky, a town of 

10,085, approximately 30 miles east of Louisville. Shelbyville is small city that has 

experienced population growth of 6.1 percent over the past five y

D

unemployment rate of 2.4 percent in 2000. The largest employers in the area are in the 

manufacturing sector. Census data indicate that the population of Shelbyville in 2000

75 percent white and 16 percent African American. Lynne Acres is 20 years old, and was

built by the current owners under the HUD-financed 223(a) 7 program. It is located on 

five acres, and includes five two-story buildings that contain 22 two-bedroom

townhouses, 8 three-bedroom townhouses, and 10 one-bedroom apartments. All of the 

units remain assisted under the Section 8 program, and the Kentucky Housing Finance 

agency is the Se

The Property Condition A

d

and accessibility, as well as in areas of site improvement (parking, paving, sidewalks;

landscaping and topography; and general site improvements). On the other hand, 

mechanical, electrical and plumbing systems were rated good, as were most interiors an

several architectural and structural systems (foundation, upper structures and floors, 

roofing exterior walls, and common areas, entrances and corridors). 

REAC inspection scores were 70 in 1999, 87 in 2000, and 73 in 2002. The PAE 

representative described the property as being in good condition, with only minima

rehab being required in the restructuring plan. This assessment was confirmed by the si

visit, during which all of the buildings and units observed were in

b

repair. The interior units observed were townhouse units and all had carpeted floors, 

kitchens in good condition, and air conditioning. The property has a large parking lot and 

playground area with a lot of open space and the building seemed appealing and well 

maintained. The only sign of wear was in some rust observe

Of the tenants interviewed for this study, three said the property was in good condition 

and the fourth considered the condition to be only fair. Each of the tenants also reported 

that a new on-site property manager arrived in the spring of 2003, and managem

improved substantially since that time. In particular, tenants reported that lawn care ha

196 
Evaluation of Mark-to-Market Program Appendix C

had been added to the children’s play area, and new trash dumpsters had been installed.

Three of the four tenants also said they had noticed more rental vacancies in the property 

since the new property manager started, and they attributed this to “problem tenants” 

having moved out. 

The Neighborhood 

The area surrounding the property includes a mix of commercial and residential 

development. The immediate neighborhood is perhaps best described as a suburban

eighborhood with most properties in the same age range as Lynne Acres. In addition to 

ere is also a substantial amount of vacant land 

mediately adjacent to the property on three sides. A 68-unit, conventional multifamily 

ries are

notes that there are no

ajor adverse influences or hazards in the immediate neighborhood that detract from the 

cent of the housing units in Lynne Acres’ census tract were vacant in 2000,

nd that the rental housing vacancy rate was 4.8 percent, and that the homeownership rate 

i

of

the

to

asher and dryer hook-ups, something Lynne Acres lacks. 

n

the commercial and residential uses, th

im

property is being constructed on the north side of Lynne Acres. 

Lynne Acres is accessed via a small road at the back of a large shopping center, and is

somewhat isolated as a result. However, there are residential neighborhoods nearby 

which include a mix of single-family homes and duplexes. The shopping center offers a 

variety of services within 4 blocks of Lynne Acres, including grocery stores, drug stores,

fast food restaurants, banks and laundries. In addition, schools, churches and libra

within walking distance of the property. The property appraisal

m

neighborhood. 

The Housing Market 

According to Census data, the census tract in which Lynne Acres is located had a 20 

percent poverty rate in 2000, down from 28.6 percent in 1990. Census data also indicate 

that 7.1 per

a

n the tract in 2000 was 45.4 percent. A substantial increase in the proportion of Hispanic

residents resulted in a change in the racial composition of the census tract from 1990 to 

2000. In 1990, less than one percent of the individuals residing in the census tract were

Hispanic origin, while nearly 12 percent of the residents in the tract in 2000 were 

Hispanic. In 2000, the census tract was 65.6 percent white (down from 74.3 percent in 

1990) and 19.3 percent black (down from 25.3 percent in 1990). 

Based on information from the property appraisal documents and observations during

site visit, other rental property in the Shelbyville area appears to be in similar condition

the Lynne Acres property. The owner said that most apartment buildings in the area have

w

Of the four tenants interviewed during the site visit, three were white and one was 

African American. All of the tenants interviewed said that affordable housing is difficult 

to find in Shelbyville. On the other hand, the waiting list for Lynne Acres had only nine

people on it at the time the appraisal was completed, and representatives of the 

Shelbyville Housing Authority report that there are two other Section 8 properties in 

197 
Evaluation of Mark-to-Market Program Appendix C

Lynne Acres. Indeed, one of the tenants interviewed during the site visit reported only

waiting two months for her apartment in Lynne Acres. In addition, the housing authority 

manages a 102-unit public housing property, with a current waiting list of 8 individuals

and estimates that a person entering the

,

waiting list at the current time might expect to 

ait up to one year for a unit. Several years ago, the housing authority tried to take over a

44-unit conv but failed

get the pro sed the

the opinions of

sidents, there do appear to be several affordable housing options in Shelbyville.

Fin

The property was built in 1983, under what the owner describes as a minority set-aside 

program in which two properties in Kentucky were set aside for the Section 8 program. 

ura Roland, one of the owners, was awarded the HAP contract. He joined with three

other developers as owners of the property in a limited partnership, and ownership has 

ot changed since that time. The chief partner is Michael Hess, and it was he who spoke 

for the partnership to provide information about the property and the M2M restructuring 

for this study. Management of the property is provided by an identity-of-interest 

ompany that is owned by the same partnership as the project. 

ccording to the owner, he entered the M2M program because there were few other 

economically feasible to opt out of the Section 8 program, because lowering the rents to 

market rent without the debt restructuring would make it impossible to operate the 

property. In addition, the owner does not think the properties can compete with other 

properties in the unsubsidized market, primarily because of the lack of washer and dryer 

hook ups. 

 (PAE): The Siegel Group 

e in real estate development, finance, and real estate analysis. In addition to the 

nt; 

h state professionals,

rest

An he

yn leted. The 

d e 

it

Pro as

lso cres

w

entional building that was going through foreclosure proceeding,

to perty when it was sold at auction. This would have further increa

supply of affordable housing in the community. Nevertheless, despite

re

ancial History of the Project 

L

n

c

A

options available as the HAP contract was due to expire. The owner does not consider it 

The Participating Administrative Entity

HUD referred the restructuring of Lynn Acres to the Siegel Group, a private PAE that 

sp cializes

M2M program, the Siegel Group works on: market studies; real estate asset manageme

risk evaluation and due diligence reviews; and, residential real estate acquisition and 

re abilitation. The Siegel Group staff includes a combination of real e

affordable housing specialists, former State housing finance agency officers, former 

bankers, and real estate development practitioners. They have completed more than 50 

ructurings through the M2M program, most of which have been Full restructurings. 

underwriter who has been with the Siegel Group since January 2001 is managing t

L ne Acres deal. He has worked on 25-30 M2M deals that are now comp

un erwriter currently works full-time on M2M work, but previously spent part of his tim

doing asset management compliance reviews for the Low Income Housing Tax Cred

gram. Concurrently with Lynne Acres, the underwriter assigned to the property w

a working on four other Full restructurings. He worked with the owner of Lynne A

198 
Evaluation of Mark-to-Market Program Appendix C

on three other restructurings, and had a relatively good experience working with this

wner. The PAE has expressed some concerns about the capacity of the owner to manage 

o

The property was assigned to the PAE in March 2003, and a Full M2M restructuring 

process began at that time. (The HAP contract was to expire in June.) 

The property appraisal was completed on April 29, 2003. 

e

n

5,

be

e

e

property, but the PAE expects that the property will end in a successful closing. 

o

the property, with respect to keeping the property fully occupied, and issues related t

financial management of the property. 

Milestones in the M2M Restructuring Process 

The following are key milestones in the M2M restructuring process: 

•

• The PCA was completed on April 8, 2003. (Comments about findings appear above 

in the section on The Property.) 

•

• The first Tenant meetings were held on May 27, 2003. (Details are below in th

Tenant Involvement section.) 

• The second Tenant Meeting was held on June 26, 2003. (Details below.) 

• The restructuring plan was submitted on August 13, 2003. OMHAR reviewed the 

plan and provided comments to the PAE. In its comments, OMHAR asked for 

clarification about the rehab costs, timing of rehab work, and rationale for having

some rehab items in year one. OMHAR also asked the PAE to give less consideratio

to one of the comparable properties used to establish market rents, and to comment on

whether expenses included in the restructuring plan were adequate to properly 

maintain and operate the property. 

• A revised plan, and responses to OMHAR’s questions, were submitted on August 2

2003. 

• OMHAR responded with additional questions, focusing on reasons for the current 

vacancy rate of 10 percent and the sources and uses of financing. 

• The PAE responded to the second set of questions from OMHAR in September 2003

by clarifying the sources and uses of the financing section of the plan and by 

explaining that the currently vacant units require “make ready” repairs and cannot

rented until these are completed. The PAE believes that the vacancies will not b

filled until after the closing is conducted and the repairs can be made. 

• As of October 15, 2003, the PAE reported that the plan was to be referred to the

portfolio office loan committee for review. No closing date has been set for th

199 
Evaluation of Mark-to-Market Program Appendix C

• The PAE’s best estimate is that closing will take place in January 2004. 

The PAE describes the restructuring process as having proceeded smoothly without 

excessive delay or complications. The property is in good physical condition and the PAE

considers the amount of rehab required under the restructuring plan to be minimal. Five 

units require make-ready repairs such as painting and carpet replacement, and one of the 

buildings needs some foundation repairs. The owner reported that information

by the PAE and by OMHAR on the M2M process had been helpful, and that he felt the

process has worked smoothly. 

provided

Tenant Involvement in the M2M Restructuring 

Members of the resea t instead collected

opies of the meeting minutes, held discussions with PAE staff, and conducted interviews 

ts to assess the tenant involvement in the M2M process. 

The first tenant meeting was held on May 27 and lasted only 20 minutes. The PAE’s 

underwriter for the Lynne Acres deal led the meeting. The Lynne Acres property 

manager and maintenance staff person also attended. Only four tenants attended the 

meeting and they had few questions or comments. The meeting included an introduction 

to the PAE, an overview of the M2M program, and a description of the differences 

between project-based and tenant-based rental assistance. The PAE noted in the minutes 

that they informed tenants that there were three potential outcomes of the M2M program

for the Lynne Acres property. First, it could end with a closed restructuring with little 

change to tenants. The second outcome would involve the owner opting out of the 

Section 8 program, in which case tenants would receive tenant-based rental assistance 

and/or the tenants could remain at the property. Finally, tenants were informed that the 

third option would be for the property to convert to tenant-based assistance. According to 

e PAE there was little discussion from the tenants about the information presented. The 

PAE also invited tenants to comment on the condition of the property and management 

and maintenance. According to the minutes, tenants reported being satisfied with the 

management and maintenance of the property, and they hoped that the property would 

remain in the project-based Section 8 program. 

Seven tenants and a consultant to the PAE attended the second meeting, held a month 

later, on June 26. This meeting lasted more than one hour. In this meeting there was more 

emphasis on the rehabilitation needs of the property, and less on the M2M process. In 

fact, when asked to describe the purpose of the meeting, one of the tenants interviewed 

during the site visit said it was an opportunity to discuss maintenance needs at Lynne 

Acres. The minutes of the meeting list the types of repairs tenants said should be 

undertaken. All in all, these appear relatively minor and include items such as new 

carpeting, new kitchen flooring, painting the front door, and additional playground 

equipment. The most substantial requests were for a perimeter fence to be installed 

around the property, and that leaks in the door and window frames are repaired. 

rch team did not observe the tenant meetings, bu

c

with four tenan

th

200 
Evaluation of Mark-to-Market Program Appendix C

Additional information was obtained in the tenant interviews conducted for the study. Of 

the four tenants who were interviewed, one

1983, two had lived there for one year, and the fourth had lived there only 2 mo

Non nde but three ha d the second.

tenant had not attended either meeting, but he out tings

attended. This tenant had concerns about the potential for rent increases as a result of the 

M2M process. Among all tenants interviewed, the chief concern was that the 

structuring process would result reases eir m ents. Even 

after assurances from the PAE at the meetings that this would not occur, some concerns 

main among the tenants about whether the process will have a negative impact on their 

us

arket rents. As shown in the 

pical historical vacancy rate for the property is 5 percent. At the time the restructuring 

had lived at Lynne Acres since it was built in

nths.

e had atte d the first tenant meeting, d attende The fourth

ard ab the mee from others who had 

re in inc to th onthly rental paym

re

lives. 

Details of the M2M Restructuring 

Rent Levels 

Table 6 compares the new rent levels proposed in the restructuring plan with the previo

rents, and compares all the rents as a percentage of fair m

table, the most substantial change is for the one-bedroom units. Prior to restructuring, the

rents for one and two-bedroom units have been approximately 140 percent of market 

rents, with three-bedroom units closer to market rents. At full occupancy, the change in 

rents would result in a reduction in annual rental income of $40,320. This is the 

difference between annual rental income from pre-restructuring rents and annual rental 

income using post-restructuring rents, assuming the property is fully occupied. The

ty

plan was completed the vacancy rate was 10 percent, due to the number of units that 

require “make-ready” repairs (painting, new carpet, etc.) For the purposes of projecting 

income and expenses, the restructuring plan assumes a vacancy rate of 7 percent. 

201 
Evaluation of Mark-to-Market Program Appendix C

Table 6. Rent Levels Pre- and Post-M2M

New Contract Rents Previous Contract Rents

Unit Type

HUDEstablished 

FMRs 

PAE Market

Rents Rent 

Rent as 

Percent 

of FMR Rent

Rent as 

Percent of 

FMR 

One-Bedroom $350 $350 $350 100% $493 141% 

Two-Bedroom $393 $489 $489 124% $552 140% 

Three-Bedroom $548 $525 $525 96% $613 111% 

Financing 

he PAE estimates that the unpaid balance of the existing first mortgage at closing will 

tructured in the

rm of a new 30-year first lien of $525,000, with interest rate of 6.75 percent. This will 

d

E’s review of the 2002 financial statement. In the restructuring plan, the PAE 

as underwritten operating expenses of $3,268 per unit per year, based on an increase in

ement contribution from $5,562 ($139 per unit per year) to 

19,250 ($481 per unit per year). This results in an adjusted net operating income for the 

and 20 percent of the rehab escrow. This cash

ontribution will be recovered over the first seven years at the rate of $4,438, paid as the

T

be $1,095,197. This will be paid off at closing and the debt will be res

fo

be a 223(a) 7 loan that also carries a mortgage insurance premium of 0.5 percent. A

HUD-held second mortgage of $832,917 (30 years at 1 percent interest) will also be 

provided, representing 75 percent of the unpaid balance of the existing first mortgage. 

There is no third lien proposed in the restructuring plan. 

Historical operating expenses for Lynne Acres have been $3,072 per unit per year base

on the PA

h

the annual reserve for replac

$

property of $57,131 or $1,428 per unit per year. 

The owner will be required to contribute $23,917 to the restructuring at closing. This 

includes 20 percent of the transaction costs

c

capital recovery payment. 

Renovation Items and Costs 

The PAE is recommending expenditures of $32,410 for 12-month rehabilitation needs 

that include make-ready activities for five vacant units, foundation repairs to one of the

buildings, and establishment of accessible parking spaces and common areas that will

comply with the ADA. Total 20-year rehab needs are projected to be $507,683 (uninflated). Table 7 displays the largest of the 20-year rehab items. 

202 
Evaluation of Mark-to-Market Program Appendix C

Table 7. Largest 20-Year Rehab Needs 

Physical Needs Total 20-Year Needs 

Unit rear entry doors $67,200 

Carpet for living areas $64,000 

HVAC condensers $66,000 

HVAC fan coil unit $36,000 

Kitchen cabinets $32,000 

Roof covering-asphalt shingles $24,000 

Countertop and sink $20,000 

Source: Lynne Acres Restructuring Plan. 

Estimated Savings Resulting From the M2M Restructuring 

The restructuring plan projects annual savings to the Section 8 program of $40,320 

resulting from the reduced rents (this represents a 15 percent reduction in rents and $84 

per unit per month). The net present value of these savings over 20 years is projected to 

be $464,864. However, the HUD-held second mortgage of $823,917 represents a cost to 

the Section 8 program. The restructuring plan assumes a NPV of projected payments on 

the second mortgage of $266,688, and a net loss to the government (over 20 years) of 

$92,366. 

Outcomes for Tenants 

The primary benefit for current and future tenants from the Lynne Acres restructuring is 

that the project will remain subsidized with a new 30-year commitment. Additionally, the 

renovations and repairs will benefit tenants, ensuring that the units, which are currently in 

good condition, are maintained over time. 

Viability of the Project after M2M Restructuring 

The PAE believes that the underwriting used in the restructuring plan will ensure the 

long-term financial viability of the Lynne Acres property, assuming that the owners 

undertake the recommended rehab in an efficient manner and manage the occupancy of 

the property effectively. For example, they recommend that a contractor be hired to do 

the make-ready work on the five currently vacant units so that this can be completed 

quickly. If the owners rely on their management company for these repairs it will take 

much longer to complete the units and to rent them. The owner hopes that the 

restructuring will allow the property to remain financially viable over the long term. 

Lessons Learned from This Site 

The Lynne Acres property appears to be moving through the M2M process smoothly, 

with few serious impediments to a successful closing. The experience of the PAE, and the 

fact that the owner had several other properties undergoing M2M at the same time, may 

have contributed to the relative smoothness of this deal and the lack of obstacles. 

203 
Evaluation of Mark-to-Market Program Appendix C

The M2M process at Lynne Acres does not provide any specific lessons that could be 

applied to other ccessful

closing which wil mplish the goal 

of preserving subsidized housing. 

M2Ms, except that it can be considered an example of a su

l improve the long-term viability of the project and acco

204 
Evaluation of Mark-to-Market Program Appendix C

Case Study Seven: Murphy Blair Rehab II 

St. Louis, Missouri—Full Restructuring

perty, Neighborhood, Housing Market, 

alled Old North St. Louis. The property includes 15 low-rise buildings scattered across

1

nt) have 5

2002 the physical score was 74). Consistent with

e low REAC scores, all of the buildings and units visited as part of the site visit to this

property were in very poor condition. The buildings have major foundation problems, 

hich in turn, have caused other structural problems, such as uneven floors and 

ld lead to any

provement in conditions at the property. 

or the past few years the property has been owned by AIMCO, a very large owner with

artners are silent.

All of AI

IMCO h on

The Pro

and Financial History

The Property

The Murphy Blair Rehab II property is a 68-unit scattered site project located in St.

Louis, Missouri. The property is located within the central city of St. Louis, in an area 

c

several blocks. Each building has between 3 and 6 units. Most of the units are large—3

(46 percent) have 3 bedrooms, 12 (18 percent) have 4 bedrooms and 5 (7 perce

bedrooms. The buildings were constructed in the 1920s. 

The REAC financial scores for the property were 33 in 2000 and 50 in 2001, with no 

score for 2002. The property also had low physical scores of 29 in 1999 and 48 in 2000. 

(No score was provided for 2001 and in

th

w

separating walls. The roofs of many buildings have deteriorated and there are holes in 

interior walls. Mold and mildew are a problem. The units were in disrepair as well. Some

kitchen floors were rotting, kitchen cabinets and countertops were in disrepair, and units 

need new appliances. Bathrooms, too, were in very poor condition, and carpeting 

throughout units was old and worn. 

There has been a great deal of turnover in the property management over the last few 

years. Emerson Management Solutions took over on July 1, 2003. The residents 

interviewed for the study were skeptical that new management wou

im

F

properties across the country. AIMCO came to own the property through its acquisition 

of a large portfolio from another property owner. AIMCO is structured as a limited 

partnership, and all of the partnerships are about 20 years old. AIMCO is the general 

partner and all other p

MCO’s M2M deals are being managed out of their Beverly Hills office.

A as about 150 M2M properties currently in the pipeline, and has closed

another 50. Some 150 more properties will be joining the program soon. 

205 
Evaluation of Mark-to-Market Program Appendix C

A Full M2M deal is really the only option for this property. The market would

support opting out, and with all the required repairs, a Lite is not an option. The owner

may consider selling to a nonnotprofit at some point. 

e

nd

oarded up. The tract poverty rate for the property in the 2000

ensus was 65 percent, and remained unchanged from the 1990 Census. The home 

ownership ra t in 1990.

remaining split 

bout evenly between commercial and institutional properties. The immediate 

rants,

undries, groceries, churches and schools, most within walking distance of the property. 

jority observed in the 

rr

he t

e

According to the 2002 Census vacancy report, the citywide rental vacancy rate dropped 

to 6

to the 2000 census data, the tract rental vacancy rate was about 30 percent. Although the 

ac y, as well as local housing

fficult because most of the units 

M difficult to use Housing choice

u Authority manages about 

0 ers.

As noted earlier, the current owner, AIMCO, acquired the Murphy Blair property several 

any properties from another owner with a large 

ortfolio of Section 8 properties. The REAC financial scores for the property were 33 in

2000 and 50 in 2001. 

The Participating Administrative Entity (PAE): RER 

e

and

dili

The Neighborhood 

Murphy Blair Rehab II is in a deteriorated, inner city neighborhood that has begun to se

some renovation including the construction of some new tax credit properties a

renovation of other properties. At the same time, numerous properties remain dilapidated 

and/or abandoned, and b

C

te in the tract was only 8.5 percent in 2000, down from 12 percen

About 80 percent of the properties in the area are residential, with the

a

surrounding neighborhood has a range of services including fast food restau

la

All of the residents interviewed at the property, and the vast ma

su ounding area, were African American. According to the 2000 Census, 99 percent of 

tract residents are non-Hispanic, black. 

T Housing Marke

Th City of St. Louis overall had a rental vacancy of over 10 percent from 1998 to 2001. 

percent in 2002. The vacancy rate in the property tract was much higher. According

v ancy rate is high, residents interviewed for this stud

officials said that finding alternative housing would be di

at urphy Blair have at least 3 bedrooms. It is reportedly

Vo chers to rent large units in the area. The St. Louis Housing

50 0 units each of public housing and Housing Choice Vouch

Financial History of the Project 

years ago as part of an acquisition of m

p

OMHAR assigned Murphy Blair to RER, a private PAE. RER is a commercial real estat

consulting firm, headquartered in Herndon Virginia, with offices in Dallas, Boca Raton 

Boston. The firm and its affiliates perform a broad range of services including: due 

gence and underwriting of real estate assets for loan origination and asset acquisition;

206 
Evaluation of Mark-to-Market Program Appendix C

commercial loan servicing on performing commercial real estate loans; asset 

n other

gov

his restructuring is being managed out of RER’s Dallas office. The person assigned to 

dea

esta

structurings, mostly Fulls. Previously, he worked on another 15 to 20 M2Ms and these, 

o, were mo

on

ical

d April 15, 2003.

The original due diligence was completed May 22, 2003. 

In mid-July the PAE received OMHAR approval for a tim

tructural report that was recommended by the original PCA. The 

contractor was engaged shortly thereafter and the second structural study was 

market), substantial rehabilitation (the required 12-

month rehab is estimated at $244,032 or $3,589 per unit), and an overall cost to the 

ther total renovation

or demolition, either of which will have significant impacts on the underwriting. 

ma agement/disposition; real estate investments; GSA consulting services; and

ernment agency services. 

T

Murphy Blair Rehab II has been with RER for four years, and has been working on M2M 

ls for the past two years. Prior to his work on M2M he worked on commercial real 

te. Concurrently with the Murphy Blair deal, he was working on 21 M2M

re

to stly Fulls. 

Milestones in the M2M Restructuring Process 

The following are key milestones in the M2M restructuring process: 

• The owner submitted the original request to OMHAR in October 2002. 

• The property was assigned to the PAE on March 12, 2003. 

• The first tenant meeting was held on May 14, 2003. (See Tenant Involvement Secti

Below for details.) 

• The draft Physical Condition Assessment report was submitted April 4. The phys

inspection report found major structural problems at several of the buildings, 

requiring a more detailed inspection. These problems include unstable foundations 

which in turn have caused other structural problems, such as uneven floors and 

separating walls, and roofs that have deteriorated. 

• The Appraisal Report was submitte

•

• e and fee waiver for the 

additional s

completed in September. 

• A draft restructuring plan was submitted October 20, 2003. The plan called for 

exception rents (4.5 percent above

government of $555,026 over 20 years. 

• Within 1 week after the submission of the draft plan, one of the buildings was cited 

by the city for serous code violations. The management agent has relocated the 

tenants, and boarded up the building. The building will require ei

207 
Evaluation of Mark-to-Market Program Appendix C

• A second tenant meeting was scheduled for October 21, 2003, just after the 

PAE reports that, in spite of adequate 

• As of mid-No t from OMHAR about how 

. They that t erty the ntin om M2M, or 

ld until the owner es the issue wit ondemned buildin

nan olve in t 2M truc g

d by the staff member responsible for the restructuring. The on-site property 

he meeting as did the owner’s regional manager. No 

D or any public officials attended the meeting. Missouri has no 

s stated earlier, no tenants came to the second scheduled tenant meeting in September. 

ere conducted with five residents for this case study. Two of them had 

ttended the first tenant meeting. These tenants, as well as those who did not attend the 

ty. They

g

ent Levels

he draft plan called for exception rents for this property. At the time of the final 

nts.

as of mid-November 2003. 

e ts was 123 percent of market rents. This ranged from

 units, up to 38 percent above market for the onent above market for two-bedroom units. The proposed postt above market rent, though they are only 75 

ercent of the local FMR. Table 8 compares rents by bedroom size. 

restructuring plan was submitted. The

notification, no tenants attended. 

vember, the P

expect

AE was wai

he prop

ting for ins

will ei

ructions

to proceed r be disco ued fr

placed on ho resolv h the c g.

Te t Inv ment he M Res turin

The first tenant meeting was held on May 19, 2003, and 8 tenants attended. The PAE was 

represente

manager also attended t

representatives from HU

OTAG recipient. Both the PAE and the owner said that tenants were well informed, 

understood the Mark to Market program, and that few had any complaints about the way

the meeting was handled. Most of the meeting focused on tenant complaints about the 

condition of the property, including concerns about security, heating air conditioning, 

broken windows, and poor maintenance of outdoor spaces. 

A

Interviews w

a

meeting, knew that “something was going on” with the financing of the proper

all seemed to understand that their rents would not change. At the same time that the 

M2M meetings were taking place, the property management company changed, so most 

residents were more focused on the possible impact of changes in management, rather 

than on changes in property finances. 

Details of the M2M Restructurin

R

T

restructuring plan, a RAPP must be submitted for properties asking for exception re

Since the final plan has not been submitted yet for Murphy Blair, no RAPP has been

prepared

Th total value of pre-restructure ren

just above market for the five-bedroom

bedroom units, and 40 perce

restructuring rents are uniformly 4.5 percen

p

208 
Evaluation of Mark-to-Market Program Appendix C

Table 8. Rents Pre- and Post-M2M 

New Rents Current Contract Rents 

Unit Type 

HUDEstablished

FMRs 

PAE Market 

Rents 

Exception 

Rent 

Rent as 

Percent 

of FMR Rent 

Rent as 

Percent of 

FMR 

One-Bedroom $439 $390 $408 93% $538 123%

Two-Bedroom $536 $447 $467 87% $629 117% 

Three-Bedroom $695 $581 $607 87% $712 102%

Four-Bedroom $905 $658 $688 76% $736 81%

Five-Bedroom $999 $745 $779 78% $762 76%

Note: There are multiple types and sizes of each unit type. These numbers reflect weighted 

averages.

Estimated Savings

Even with the exception rents, following the restructuring, rents will decrease by about 

15 percent (an average of $102 per unit per month). This decrease in rents results in an

annual savings of $83,460 in Section 8 costs, and a total NPV of savings of $1,059,17

over 20 years. However, because of the large write-off of the current mortgage, the ne

cost to the government over 20 years amounts to $555

1

t

,026.

Financing 

ble to make ongoing mortgage 

ayments—adjusted net operating income was on the order of $222,000 while the debt 

tim

The

• 

• 

• 

en

As

esti

incl

• 

Over the next 20 years the rehab needs (not inflated) will be $1.25 million ($922 per unit 

Prior to the restructuring, the property was una

p

service was about $327,000. (The UPB on the mortgage will be about $2.6 million at the

e of restructuring with an interest rate of 10.6 percent). The property was HUD-held. 

proposed new mortgages are as follows: 

A 30-year first mortgage for $1,013,000, at 6.75 percent interest. 

A second mortgage for $1,596,455, at 1 percent for 30 years. 

A third mortgage for $1,012,457, also at 1 percent for 30 years. 

R ovation Items and Costs

noted above, the property is in poor condition. The required 12-month rehab is 

mated at $244,032 ($3,589 per unit). The main items requiring immediate repair 

ude:

• $110,000 for structural repairs. 

• $38,794 for lead paint abatement. 

$7,128 for roof repairs. 

• $20,000 for renovation of a down unit. 

209 
Evaluation of Mark-to-Market Program Appendix C

per year). In order to ensure that the property is prepared for these expenses the initial 

deposit to the reserves for replacement is set at $575,000 ($8,456 per unit), and the 

annual deposit will inc ,720 per year ($540

per unit). 

Outcomes

If the restructuring does proceed to closing there will be positive outcomes for the tenants 

with regard to the condition of the properties. In the short term, the most serious 

addressed, such as the foundations and roofs. The interior problems—

non-working heating systems, rotted kitchens, thread-bare carpets, old refrigerators and 

r for the property to become financially 

viable, debt service payments would decrease substantially to $83,882 per year. The 

n

inity).

• The owner of the property has worked with several HUD Field Offices on M2M 

deals, handling with a large number of contractors and subcontractors, each of whom

had different requirements. The owner found that part of the process very frustrating, 

as some regions are easier to work with than others. In the case of Murphy Blair, 

there has been little HUD regional involvement. 

rease from the current $14,752 per year to $36

for Tenants

problems will be

ovens—are scheduled to be addressed over the next five years, with each system taking 3

to 5 years to complete across all units. 

Viability of the Project after M2M Restructuring 

Following restructuring, income would decrease substantially due to the rent reduction, 

and expenses would increase slightly. In orde

management would have to reduce tenant turnover, which presumably would happe

only after a significant rehabilitation of the property. 

Lessons Learned from This Site 

Several lessons can be learned from this site. 

• This property is an example of a project in very poor condition, for which the M2M 

program may not be well-suited. If the property does close under M2M, the cost to

the government, just in terms of insurance fund write-off, will be over $500,000, and

this is before taking into account the fees to the PAE. It is not clear why the 

government should invest that amount of money to retain this property. The property 

has high vacancies, and it is located in an area with high vacancies (although the 

tenants interviewed said that they had few other options because of the scarcity of 

large units in the vic

• The owner has also worked with a number of PAEs, and felt that they had varying 

degrees of competence. The owner was very pleased that AIMCO has an agreement 

under which they only work with two of the large PAEs. 

210 
Evaluation of Mark-to-Market Program Appendix C

Case Study Eight: Myrtle Manor 

Phoenix, Arizona—Full Restructuring

perty, Neighborhood, Housing Market, 

million. Myrtle Manor 

as 44 units spread throughout one 1-story and four 2-story buildings; it also has a

d 10

he property has been owned since 1992 by Myrtle Manor Associates, an Arizona

rised of Raymond Morrison, the general partner, and Jewel 

vestment Company, the limited partner. It was originally subsidized under the Section 8 

ty

structed of a wood frame exterior over concrete block and wood 

aming. Each two-bedroom unit contains a living area, dining area, kitchen, two 

h

d

n, reflecting the strong maintenance program the 

anagement company follows. Deferred maintenance is minimal, since the management 

al 

.4

hat

The Pro

and Financial History

The Property

Myrtle Manor is a family apartment complex located on 2.9 acres of land approximately 

nine miles northwest of downtown Phoenix, Arizona. Phoenix is located in Maricopa 

County and is the nation’s 7th largest city with a population of 1.3

h

separate 1-story building housing the laundry facilities. The buildings were constructed in

1982, and consist of 34 two-bedroom units with approximately 924 square feet, an

three-bedroom units with 1,028 square feet. 

T

limited partnership comp

In

New Construction program. As such, it would be considered a newer subsidized proper

in the Mark-to-Market program. Myrtle Manor is professionally managed by Biltmore

Properties, Inc., a company unrelated to the owner. Biltmore Properties currently 

manages over 2,200 units in 32 HUD-subsidized properties throughout Arizona. 

The buildings are con

fr

bedrooms, and a bath. Four of the two-bedroom units are handicapped-accessible. Eac

three-bedroom unit contains a living area, dining area, kitchen, three bedrooms, and one 

and one-half baths. There is adequate on-site parking, with roughly 69 spaces on a goo

asphalt parking lot. There is a well-maintained, landscaped common area with lawn and a 

children’s playground. 

The building units are in good conditio

m

company has kept a strict repair and replacement policy to date. Hence, there are minim

immediate repair needs required. REAC inspection scores reflected the high level of

maintenance with Myrtle Manor, with scores of 91 in 1999 and 94 in 2002. 

According to the 2000 Census, the tract in which Myrtle Manor is located had an 18

percent poverty rate, up from 10.3 percent in 1990. The 2000 Census also indicated t

the property is located in a tract that is roughly 62 percent white, 5 percent black, 26 

percent Hispanic, and 6 percent native American or multiracial. 

211 
Evaluation of Mark-to-Market Program Appendix C

The current contract administrator for Myrtle Manor, and for the Section 8 program in 

Phoenix, is the City of Phoenix. A new State organization, the Arizona Public Hous

Authority, is scheduled to take over this role as the new performance-based contract 

administrator (PBCA) for the State of Arizona. 

The Neighborhood 

ing

yrtle Manor is located in a neighborhood that is a mixture of multifamily residences, 

sing

eveloped. The area is predominantly (50 percent) single family homes, with roughly 20 

ll and Chris Town

Mall, both of which contain many retail stores. North Phoenix Medical Center is 

0

pares to a homeownership rate of roughly 66 percent nationally. The 

ntal vacancy rate in this tract was 4.0 percent, significantly down from the 22.2 percent 

five

eason was to determine the Section 8 

ccupancy of Myrtle Manor relative to other properties in the same market area. The 

appraisal found that all other properties had 100 percent or nearly 100 percent occupancy, 

with a vacancy rate for subsidized housing in this market ranging between 0 to 2 percent. 

Financial History of the Project 

he property appears to have had a sound financial history. The unpaid balance on the

note was $1.5 oted

bove, deferr e followed

ere 79 in 2000, 75

is

the

M

le-family homes, commercial, and vacant land. It is approximately 90 percent 

d

percent multifamily housing, and 20 percent commercial development. Roughly 10 

percent of the land is vacant. Most of the properties are maintained to an acceptable level

and do not appear to negatively affect Myrtle Manor. The ages of buildings in the area 

range from 10 to 65 years and include some newer construction. 

The property is approximately 2 miles from both the Metro Center Ma

approximately two blocks from the property, and nine different Houses of Worship are 

located in close proximity to the property. 

The Housing Market 

According to 2000 Census data, the majority (60 percent) of households in the tract in

which Myrtle Manor is located are renter occupied and the homeownership rate is 4

percent. This com

re

rate recorded in the 1990 Census. The appraiser stated that the average age of housing in

the tract is 32 years. 

The appraisal report considered six additional Section 8 properties in addition to

conventional properties used as comparables. The r

o

T

million as of April 2003, at an interest rate of 6.95 percent. As n

a ed maintenance is minimal, given the strict maintenance schedul

by the property manager. The HUD FASS scores for Myrtle Manor w

in 2001, and 74 in 2002. At the time of the site visit, 100 percent of the units were 

occupied and the on-site manager reported a waiting list of approximately one year. 

H torically, the vacancy rate of Myrtle Manor has been less than 2 percent. In addition,

property’s bad debt/collection losses have been roughly just 1 percent.

212 
Evaluation of Mark-to-Market Program Appendix C

According to the restructure plan, per-unit projected expenses are below the IREM 2001

xpenses for garden apartments, but above the expenses estimated for comparable 

s of

My

found that expenses on these three were higher than Myrtle Manor, leading the PAE to 

con

xamined property payables and confirmed there was no excess obligation to be paid. 

HU

in A a

dist ce

includes the Federal Deposit Insurance Corp., Federal Savings and Loan Insurance Corp. 

SLIC), the Resolution Trust Corp. (RTC), and recently the U.S. Department of 

Housin

To man 1) a

restruct

restruct g

model c

field sp ct the

first ten rks with vendors, performs closings, 

anages the collection of documents for submitting to HUD, and handles the postbee

40

one

rest

The underwriter/restructure specialist working on Myrtle Manor was hired by ONTRA 

ate

lated companies as a CFO. His formal training is in accounting. At the time of the 

turings. Of these,

yr anaged. 

Milestones in the M2M Restructuring Process 

he followin

e

properties. The PAE obtained a Comparable Expense Data report comparing expense

rtle Manor with similar projects with 40 to 65 units. Three of these were used and 

clude that expenses for Myrtle Manor were reasonable. In addition, the PAE

e

The Participating Administrative Entity (PAE): ONTRA, Inc. 

D referred the restructuring of Myrtle Manor to ONTRA, Inc., a private PAE located

ustin, Texas. ONTRA has been supporting government organizations, primarily as

ressed asset underwriter and manager, for over 20 years. The company’s experien

(F

g and Urban Development (HUD) through the M2M program. 

age their M2M business, the company is divided into three in-house teams:

ure specialist team; 2) a field specialist team; and, 3) an administrative team. The 

ure specialist team develops the plan, handles underwriting, runs underwritin

alculations, handles the second tenant meeting, and deals with the owner. The

ecialists develop the market rents, handle comparable assessment, and condu

ant meeting. The administrative team wo

m

closing process. 

ONTRA, Inc. has completed about 280 M2M restructurings, of which roughly 80 have 

n Fulls and 200 have been Lites. The organization is currently responsible for about

M2M deals in progress, virtually all of which are Fulls. ONTRA has completed only 

Lite since July 2001. ONTRA has operated nationwide, with many of their 

ructurings occurring in the Midwest and West. 

earlier this year. Prior to this position, he had worked for a variety of smaller real est

re

interview, he had managed (or was managing) about six Full restruc

M tle Manor appeared to be the least problematic restructuring he had m

T g are key milestones in the M2M restructuring process: 

• OMHAR assigned Myrtle Manor to ONTRA on March 13, 2003. The PAE ordered

the third-party appraisal on March 27th and the physical condition assessment (PCA) 

on March 26th. 

213 
Evaluation of Mark-to-Market Program Appendix C

• The appraisal was completed on May 22, 2003. 

• The Physical Condition Assessment was completed on April 23, 2003. Because 

Myrtle Manor is in good condition, no critical and just a few immediate repairs were 

identified and easily documented in the PCA. In addition, there were several 

properties in the area that proved to be good comparables for appraisal purposes. 

ven the hot temperatures in Phoenix at that time. 

Ten residents ted by Eileen

Middendorf of ONTRA. In addition, representatives of Biltmore Properties—

Cheryl Wirtz as well as Michelle and Hector Rendon, the on-site property 

managers—were in attendance. The issue that was most important to tenants was 

ld at

the same location as the first. Prior to the meeting, notice was sent out. A copy of the 

materials was provided by the PAE to 

the onsite manager to be available to tenants for inspection. Less than 10 residents 

attended, fewer than at the first meeting. The o ficant issue raised a

m ccess p for the

• presen Full res ring pl OMHA uly 1, 200

mmitment was executed on July 29, 2003. 

• Closing occurred on October 30, 2003. 

Tenant Involvement in the M2M Restructuring 

ery small numbers of tenants attended the meetings held by the PAE and management, 

man e

fact ndance.

eneral satisfaction with management may have been another factor in low attendance. 

• ONTRA conducted the first tenant meeting at Myrtle Manor on May 13th. Prior to 

the meeting, the PAE sent notices to all residents. Also, as part of the PCA, tenants

were provided surveys in which they were asked for their opinions on the condition, 

maintenance and operations of the property. The tenant meeting took place in the park 

outside the laundry room, because Myrtle Manor does not have a common interior 

space. This location may have limited attendance at both this and the subsequent 

meeting, gi

were present for the meeting, which was conduc

the security at Myrtle Manor; specifically mentioned were poor parking lot 

lighting, and the fact that the fence at the rear of the property was not secure. 

Handicapped accessibility issues were also raised, as were some apartmentspecific issues, such as worn carpeting. 

• Due diligence was completed on June 3, 2003. 

• The Second Tenant Meeting Was Held on June 20, 2003. This meeting was he

draft restructuring plan along with additional

nly signi

munity a

t this

eeting was the possibility of installing a com oint internet.

ONTRA, Inc. ted the tructu an to R on J 3.

• The restructuring co

V

although notices were sent, which included surveys about their satisfaction with 

agement and the condition of their units and the common areas. As stated earlier, th

that these meetings were held outside in hot weather may have limited atte

G

214 
Evaluation of Mark-to-Market Program Appendix C

Five tenants were interviewed for this case study. Their views generally reflected those at

and

their responsiveness in resolving any problems or complaints. While one of the on-site 

anagers accompanied the interviewer around the property, the manager remained 

hen asked about the availability of affordable housing in the area, the tenants generally 

what they would do if they were offered a Housing Choice Voucher, most all responded 

D

nt voucher utilization in Phoenix and the

Housing Director of Maricopa County stated that 12,000 applicants are on the waiting list 

g

ent Levels

edroom unit rents 

re set at $650/month. These new rents are 65 to 70 percent of the pre-restructured rents. 

bedroom unit FMR is currently at $1,161/month. 

- and Post-M2M

the tenant meetings, and they also noted how good the current onsite managers were

m

outside of the apartment during most interviews with the resident. 

W

felt that it was difficult to find similar affordable housing in the area. And when asked 

that they would stay at the property if the current management remained. (The local HU

contract administrator has reported 100 perce

for vouchers.) 

Details of the M2M Restructurin

R

The PAE-recommended rents are consistent with the market rents determined in the 

appraisal. Table 9 compares the new rent levels proposed in the restructuring plan with 

the previous rents, and compares all the rents as a percentage of fair market rents. The 

rents on the two-bedroom apartments are $525/month, and the three-b

a

Moreover, the proposed rents are substantially lower than the local FMRs for Maricopa 

County for the same bedroom size. For two-bedroom units, the current FMR is 

$835/month, whereas the threeTable 9. Rent Levels Pre

New Rents Previous Rents 

Unit Type 

HUDEstablished 

FMRs Rent 

Rent as 

Percent 

of FMR Rent 

Rent as

Percent of

FMR 

Two-Bedroom $835 $525 63% $810 97%

Three-Bedroom $1,161 $650 56% $917 79%

Estimated Savings 

This estimated Section 8 savings are $148,000 annually or $1.7 million over 20 years, 

with total net savings to the government of $800,000 over the 20-year period. 

Financing 

• 1st mortgage in the amount of $622,100, insured under Section 223(a) (7), and 

amortized over 30 years at an interest rate of 6.25 percent. This reflects a DSCR of 

1.20 at the proposed rents, resulting in an expense cushion of 9.1 percent. 

215 
Evaluation of Mark-to-Market Program Appendix C

• A 2nd mortgage in the amount of $815,000, at an interest rate of 1.0 percent.

in

enovation Items and Costs

he PAE’s plan for immediate rehabilitation needs identifies a modest $14,200 in total 

$3,900 for a new cinder block wall at the rear of the property. 

repairs

account. The

reserve would be replenished at closing. No share of immediate rehab items is included in 

the closing costs since these are being funded from project reserves. 

The PAE is also recommending that an initial deposit of $37,950 be made to the Reserve 

for Replacement account as part of a total $520,000 R4R costs that are estimated to be 

needed over the next 20 years. 

Outcomes for Tenants 

Apart from some enhanced security measures, such as the new fence at the back of the 

property and new security lighting, not much will be different for tenants after the 

restructuring is in place. The Reserves for Replacement will now have a built-in schedule 

for replacing, and this tighter timeframe may result in faster repairs or replacement than 

the timeframe employed by the management company prior to restructuring. Tenant 

turnover is not expected to occur in response to the restructuring since residents are, for 

the most part, uninterested in the restructuring and were already very happy with existing 

management. 

• A contingent repayment note, or 3rd mortgage, in the amount of $376,606 at an

interest rate of 1.0 percent. 

The plan includes a contribution for the owner’s share of transaction and closing costs

the amount of $6,400, which is 20 percent of the total estimated transactions costs.

R

T

costs. This includes the following estimates: 

• $6,900 for better security lighting. 

• $900 to repair damaged siding. 

• $2,500 for modifications to comply with ADA requirements. 

•

Due to the relatively small dollar amount of these needs, and the administrative expenses 

from establishing an escrow account, the PAE and management agreed that these

would be completed prior to closing and funded from the property’s reserve

216 
Evaluation of Mark-to-Market Program Appendix C

Viability of the Project after M2M Restructuring 

The long-term ou gement 

continues, and the reserves for replacem

incorporated a 5 percent vacancy rate, which is higher than the historical average of 2 to 

3 percent for the property. The neighborhood location of the property, the very good 

condition of the property, and the low vacancy rate for subsidized housing should 

t in low vacancy rates for Myrtle Manor.

as

ccur over the next 20 years, and the funding of reserves should be

hoice

—HUD’s subsidy payments for the existing tenants should be 

minimized relative to providing Housing Choice vouchers to those tenants. 

tlook for this property appears very good, if current mana

ent continue to be adequately funded. The plan 

continue to resul

Lessons Learned from This Site 

Myrtle Manor is a good example of the type of property for which the M2M program w

designed. It is a newer assisted property where current contract rents were clearly above 

local market rents. Under this restructuring, clear savings to the government are 

anticipated to o

sufficient to cover future rehabilitation and replacement needs in the property. 

Moreover, with estimated market rents for this property at roughly 60 percent of the local 

FMR—the rent standard for determining the subsidy payment under the Housing C

Voucher program

217 
Evaluation of Mark-to-Market Program Appendix C

Case Study Nine: Russell Erskine Apartments 

The Property

980s and became a Section 8 “elderly” property. 

n historic building in what is the “old” downtown

rty

lthough the building does look well-maintained, the Physical Condition Assessment 

airs, this restructuring has been complicated by the 

uilding’s designation as an historic structure. This designation meant that any M2M 

iew by the Historic Trust Board. The lead

underwriters for this restructuring, from the beginning of the process, have been unsure 

the economic development agency to 

he Huntsville, Alabama census tract that contained the property had a relatively high 

ately 75 

percent non-Hispanic white and 25 percent non-Hispanic black. Huntsville has a long 

istory asso its close

l

Huntsville, Alabama—Full Restructuring 

The Property, Neighborhood, Housing Market, 

and Financial History

The Russell Erskine Apartments is a 74-unit property in downtown Huntsville, Alabama. 

The structure was formerly a hotel, built in the early part of the twentieth century. The 

structure was remodeled in the early 1

The structure has been designated as a

of Huntsville. 

Russell Erskine had traditionally had a low vacancy rate. The building, at least 

superficially, looks well maintained. Many of the tenants have been living at the prope

for a number of years and have positive comments about the on-site management. 

A

(PCA) associated with the M2M process did identify some needed, major structural 

repairs. They are not uncommon for a property of this age, but they are usually beyond 

the scope of a M2M restructuring. These major repairs include such items as plumbing 

and electrical systems. 

In addition to the needed major rep

b

rehabilitation would have to pass a rev

how much freedom they would have in developing a Full restructuring plan given the 

situation. However, this complication also presented an opportunity. The economic 

development agency in Huntsville does have funds that could be applied to any 

rehabilitation of the project. Since the opening stages of the M2M process the 

underwriters have been in negotiations with

develop a joint rehabilitation plan. 

T

poverty rate of 36.6 percent, according to 2000 census data. The city is approxim

h ciated with the development of the Tennessee Valley Authority (it s

to the Muscle Shoals dam), and has several large military installations. It also has severa

manufacturing plants. 

218 
Evaluation of Mark-to-Market Program Appendix C

The Neighborhood 

The Russell Erskine apartments sit in the middle of the “old” downtown of Huntsville. 

ike many downtowns, this is an economically mixed area. Some portions of the 

itation

in this area. 

he area immediately surrounding the complex is characterized by a variety of small 

t revitalized and 50

ercent semi-deserted. Despite the deserted portions of the area, the tenants stated that 

The

c e ownership in this 

art

imm

e it

it le

uni lity

than those at Russell Erskine. Tenants did believe that there were affordable units in the 

lic

Fin

he firm in Memphis that owns fewer than 10 

app

es

tion is one of the few public PAEs that 

have consistently maintained a large presence in the M2M program. Most of the 

L

downtown appear semi-deserted, while other blocks have a variety of new, small retail 

outlets including restaurants and cafes. As mentioned above, the Huntsville city 

government has made a major commitment to promoting development and rehabil

T

retail outlets. The several blocks around the hotel are about 50 percen

p

they felt secure in the neighborhood. 

Housing Market

Ac ording to the 2000 Census Report for the tract, the level of hom

p of Huntsville is a moderate 46.5 percent. The downtown area, in particular, does 

have a large number of private sector multifamily units. The rental vacancy rate in the 

ediate area is a modest 8.6 percent. 

Th tenants interviewed for this report indicated that they would be able to locate a un

w h a Housing Choice voucher. However, most of the tenants believed that the availab

ts, which would be in downtown Huntsville, would be significantly lower in qua

suburbs of Huntsville, but were reluctant to move there because of the lack of pub

transportation and need for a car. 

ancial History of the Project 

T Russell Erskine is owned by a commercial

Section 8 properties. The tenants mentioned that there had been considerable turnover in

on-site management in the last several years, and it often takes considerable time to get 

roval from Memphis for needed repairs. 

D pite the problems mentioned above, the property has consistently received REAC 

financial scores in the 80s and 90s. 

The Participating Administrative Entity (PAE): 

Jefferson County Assisted Housing Corporation 

The Jefferson County Assisted Housing Corpora

underwriting activities of the PAE are performed on a contractual basis by individual

underwriters in the Montgomery, Alabama area. However, the underwriting consultants 

employed by Jefferson County have considerable experience working with the M2M 

219 
Evaluation of Mark-to-Market Program Appendix C

program, and interviews with these underwriters indicated a detailed understanding of the 

ties to specific underwriters. This individual is also

sponsible for conducting all requisite tenant meetings for a M2M restructuring. 

Milestones in the M2M Restructuring Process 

The following are key milestones in the M2M restructuring process: 

The property was assigned to Jefferson County in January 2003. Within the month the 

ird-party vendors for the Physical Condition Assessment (PCA) 

and the Rent Comparability Study. 

The single tenant meeting held to date was on March 9, 2003. 

Both the PCA and the Rent Comparability Study were submitted to the PAE in April, 

2003. 

gence review of the owner in April 2003. The due

ied the problem of the apartments being designated an 

approval from OMHAR, the PAE and owner began 

evelopment agency reached a 

development funds in the M2M 

proposed

“additional funds”

M2M process. They also indicated a good understanding of subsidized housing issues in 

general. 

A single senior staff person at Jefferson County coordinates all the M2M restructuring 

activities and assigns proper

re

•

PAE had selected th

•

•

• The PAE completed its due dili

diligence review identif

“historic structure.” 

• Beginning in May, after

negotiations with the local economic development agency to explore the option of 

combining economic development funds with the M2M refinancing. In OMHAR’s 

terminology, this would be an “additional funds” refinancing. These negotiations 

continued all through the summer of 2003. 

• In October of 2003, the PAE, owner, and economic d

tentative agreement on a strategy to include economic

financing. 

• In November 2003 the PAE received OMHAR approval to proceed with the

restructuring.

• As of the end of data collection period for this study, the PAE was developing a draft 

restructuring plan that would incorporate the economic development funds.

Tenant Involvement in the M2M Restructuring 

There were 11 attendees at the March tenant meeting. All of these tenants expressed 

general satisfaction with the current management. A number of the tenants did express a 

desire for certain unit-specific repairs. 

220 
Evaluation of Mark-to-Market Program Appendix C

Because of the complicated nature of the negotiations, the owner has kept the t

informed about the discussions with the economic development agency. Some tenants 

enants

interviewed for this study expressed concern about the time it was taking to clarify issues 

with the economic development agency, but all maintained that they were provided with 

updates on a regular basis. 

Details of the M2M Restructuring 

Rent Levels 

No plan developed yet. 

Estimated Savings 

No plan developed yet. 

Financing 

No plan developed yet. 

Renovation Items and Costs 

No plan developed yet. 

Outcomes for Tenants 

Assuming that a restructuring plan is implemented, this plan will provide a major benefit 

to the tenants. Not only will the structure be retained as affordable, but it will also have a 

very comprehensive physical upgrade, larger than can be normally obtained through the 

M2M process. 

Viability of the Project after M2M Restructuring 

No plan is developed as yet. However, the underwriters indicated that with the 

“additional funds” a viable financial plan could almost certainly be developed. 

Lessons Learned from This Site 

The lesson learned at this site was the value of external partners to a property 

restructuring, particularly for an older building with high rehabilitation expenses. This is 

a strategy that has not been employed for many M2M properties, and probably should be 

pursued more often. In this case, the underwriters took the initiative to begin negotiations 

with city agencies. However, they are probably not always the best-suited persons to 

assume this role. Perhaps greater coordination with local HUD Housing staff would be a 

good way to identify and act on opportunities for external partners. Certainly, a private 

221 
Evaluation of Mark-to-Market Program Appendix C

PAE may well not have wanted to deal with the delays to the M2M process that is 

ne

extensions to the time requireme licated deals like this. 

cessary for an outcome like this one. Consideration should be given to allowing 

nts when working on comp

222 
Evaluation of Mark-to-Market Program Appendix C

Case Study Ten: Six Chimneys Apartments Cleveland, Ohio—

Full Restructuring 

The Property, Neighborhood, Housing Market, 

and Financial History

The Property

The Six Chimneys Apartments project is located on Prospect Ave, one of the principal 

arteries of the “old” downtown of Cleveland, Ohio. The property is a four-story, brick 

elevator building that was originally constructed by the Rockefeller family in 1920. The 

property was substantially renovated in 1982 when the property was given as a charitable 

donation to the Help Foundation, Inc. The Help Foundation renovated the property so as 

to provide affordable housing and necessary support services to a tenant population 

identified as “wholly developmentally disabled.” In 1983, after renovation of the physical 

structure, the foundation began operating Six Chimneys as a Section 8 property. 

The unit mix of the structure includes 36 efficiencies, and 10 one-bedroom, one-bath 

units. The average unit size is 428 square feet for the efficiencies, and 517 square feet for 

the one-bedroom units. Unit amenities include a window air conditioning unit, electric 

range, frost-free refrigerator, carpet and vinyl flooring, vertical blinds, pull cords to 

l

creation. There is also a TV and game

room, an exercise room, a nurse’s office, a small lounge on the first floor as well as 

corridor sitting areas on floors 2 through 4. In addition, there is a counseling center, an 

on-site management office and a gated parking lot. 

t

ices at

ow

kills.

vides general health maintenance services. The 

aff also provides aid and intervention with the various government programs that 

including Medicaid, SSI, VA, and Medicare. 

their

d at all

aff assessments, tenants are allowed to leave the premises for errands as well as work 

requirements. Tenants are encouraged to conduct errands such as grocery shopping or 

obtain emergency services, and grab bars. Site amenities include an elevator, a whee

chair lift, secured entry, buzzer/intercom, laundry facility, and a community meeting 

room with a kitchen, which is used for crafts and re

The building has on-site staffing 24-hours every day. There are pull cords in each uni

and an in-house security system. Each unit has an emergency call system that, if 

activated, will alert the manager’s office and a 24-hour call service. Additional serv

Six Chimneys include educational opportunities to teach the residents skills that all

them to eventually become independent. These services include, but are not limited to, 

cooking, shopping, money management, self-hygiene, cleaning and other self-help s

There is an on-site nurse’s office that pro

st

residents must deal with,

Although the tenant population is identified as “wholly developmentally disabled,” the 

majority of Six Chimney residents are employed outside the property. Residents pay

portion of the monthly rent according to Section 8 regulations. The facility is locke

times (tenants do have keys), but visitors are allowed to come in as long as they are 

screened at the front security post, which has an attendant 24 hours per day. Based on 

st

223 
Evaluation of Mark-to-Market Program Appendix C

check cashing in groups in order to minimize opportunities for theft or other untoward 

dvances by strangers. Tenants indicated that, on the whole, they felt secure both in the

property and in the immediate environment of the property. 

The service components of the Six Chimneys are funded through a series of grants with 

tate and local health agencies. Referrals for openings normally come from local 

agen tal

isab

rent

ation of 501-c3. The

le purpose of the organization is to provide housing to individuals with mental 

d

he foundation’s other operations include a number of small residential houses where the 

sed

s.

a

erty is located is part of the designated

istoric district of downtown Cleveland. Prospect Avenue itself is a major four-lane 

traffic artery. by large

tail busines ding

structures

Six Chimneys property is easily accessible to public transportation with a bus stop 

located directly in front of the building. 

The Housing Market 

si

cc in the census data was 17.6

a

S

cies such as the Cuyahoga County Board of Mental Retardation and Developmen

D ilities. The property has maintained nearly full occupancy over its operating history 

based on its referral network with local health agencies. A high proportion of the cur

tenants have been at the property for more than 10 years. 

As noted, the owner of record of the Six Chimneys property is a foundation which 

operates as a non-profit, Board-operated entity with an IRS design

so

retardation and developmental disabilities. Six Chimneys is one of three not-for-profit 

entities managed by the foundation. The foundation itself serves as the management 

agent for Six Chimneys, so there is an identity of interest between the ownership an

management entities. 

T

residents receive fewer services and have a greater degree of freedom. Periodically, ba

on staff assessments, some Six Chimneys residents are relocated to one of these facilitie

The foundation has separate Boards of Trustees for each of their corporations. The

organization has a separate business department, a building maintenance team, and

large staff of licensed mental health professionals. 

The Neighborhood 

The area on Prospect Avenue where the prop

h

The area immediately surrounding the property is characterized

re ses (e.g., a tire dealership), smaller commercial businesses, inclu

grocery stores and banks, and restored “historic” structures. The latter

generally are maintained by non-profit organizations such as clubs or foundations. The 

The inner city part of Cleveland where Six Chimneys is located is not a prime rental or

re dential area. The home ownership rate in the census tract was only 2.1 percent, 

a ording to the 2000 Census. The rental vacancy rate

percent. However, these housing market indicators have little general applicability to the 

population that is resident at Six Chimneys, or their ability to find alternative housing. 

224 
Evaluation of Mark-to-Market Program Appendix C

Financial History of the Project 

The

rati g

a 95 tenance of the property.

Cre

exp

bec

rest

und

Credit Vest is a “full-service” PAE. Staff of the organization conducts all the essential 

 the M2M process including facilitation of the tenant meetings, development 

agr rs

for

In t d

orig

Six required, two tenant meetings were 

dvertised in the building and were comparatively well attended. The Credit Vest 

to

facilitate responses. However, interviews with tenants indicated that there was a general 

nderstanding of the purposes of the restructuring, particularly the opportunity to address

m

nderstanding of the process, a number of tenants made requests to include a cable 

The s in the M2M restructuring process:

• The prop 003, Credit

Vest had selected vendors for the Physical Condition Assessm

for the vicinity.

foundation managing Six Chimneys has consistently had high REAC financial 

ngs. In addition, the property has always received high REAC scores (the latest bein

) for main

The Participating Administrative Entity (PAE): Credit Vest 

dit Vest is a private PAE that is a large real estate company with a great deal of 

erience handling the due diligence process. It was one of the first companies to 

ome a PAE for the M2M program and has completed hundreds of M2M 

ructurings. The underwriter who handled the Six Chimneys property had extensive 

erwriting experience both for M2M and in the private sector.

functions of

of the Restructuring Plan, and negotiations leading to a closing of the restructuring 

eement. Credit Vest staff also have responsibility for selection of third-party vendo

rent comparability studies, appraisals, and Physical Condition Assessments (PCAs). 

he case of Six Chimneys, the Credit Vest staff showed considerable diligence an

inality in conducting the tenant meetings. As mentioned above, all of the tenants at 

Chimneys have severe learning disabilities. As

a

facilitator did have to depend on program staff both to “translate” questions and

u

im ediate rehab or property upgrade requirements. As an indication of their 

u

connection in the 12-month rehab package. 

Milestones in the M2M Restructuring Process 

following are key milestone

erty was referred to Credit Vest in December, 2002. By January 2

ent and the Rent 

Comparability study. On-site data collection for each of these studies was conducted 

in January 2003. 

• The first tenant meeting for Six Chimneys was held on January 29, 2003. (See the 

Tenant Involvement discussion below for details.) 

• The rent comparability study was submitted to Credit Vest on January 31, 2003. The

rent comparability study concluded that the existing HAP rents were considerably 

above market rents

225 
Evaluation of Mark-to-Market Program Appendix C

• The complete Physical Condition Assessment (PCA) was submitted to Credit Vest on

January 31, 2003. The PCA found the property to be in good to satisfactory condition 

with virtually no “critical requirements” to be funded in the initial 12-month reh

package. 

• The normal next step would have been completion of the owner’s due diligence and

development of a draft plan. At the time, the timetable seemed to indicate a projected 

date for submission of a plan about July 1,

ab

2003. However, the lead underwriter noted

several issues which required attention before a plan was submitted to OMHAR. The 

gency

R’s

eframe (May 2003) the lead underwriter made a decision to put a 

“hold” on completion of due diligence until com

annual financial st d on June 30. Based

on past experience, the underwriter assumed that OMHAR would not be satisfied 

cial statement that concluded June 30, 2002. Thus, she “held” plan 

development until the Foundation could provide 2003 financial data. These data were 

submitted to Credit Vest on August 16, 2003. 

• The second tenant meeting was held on two days, September 16, 2003, and 

September 17, 2003. (See Tenant Invol

• A draft restruc to OMHA tember 29, 200

• OMHAR approved the plan on October 21, 2003. 

• At the conclusion of the data collection period for this study, the PAE and the owner 

were in negotiations to finalize the refinancing agreement prior to a formal 

itment. 

ant meeting was held at the property. In order to accommodate the residents, 

. and one at 4:00 p.m. In addition to PAE staff 

aseworkers, several staff of the Cleveland Tenants Organization attended the 

n

this

first issue was the discovery that the initial rehab of the structure in 1982-83 was 

partially funded with MAHRA-exempt bonds. After contacts with the issuing a

it was determined that the bonds would be redeemable as of July 1, 2003. OMHA

decision was that once the bonds were redeemed on July 1, 2003, the property was 

eligible to proceed with a M2M restructuring. 

• During the same tim

pletion of the Help Foundation’s 

atement. The foundation’s fiscal year conclude

with a finan

vement section below.)

turing plan was submitted R on Sep 3.

restructuring comm

Tenant Involvement in the M2M Restructuring 

The first ten

two sessions were held, one at 11:30 a.m

and facility c

sessions. Twelve residents attended the morning session, and eighteen tenants attended 

the afternoon session. The caseworkers and the CTO staff assisted the PAE representative

in facilitating the discussions with the residents. This was felt necessary in order to 

accurately note comments from the developmentally disabled residents, and to foster a

open discussion. (Facility caseworkers also assisted with tenant interviews during

study’s on-site visit.) 

226 
Evaluation of Mark-to-Market Program Appendix C

Nineteen tenant feedback forms were completed. In general, the residents appeared to be

satisfied with the management and the overall property maintenance of Six Chimneys. In 

con

restructuring was an opportunity to install cable in the facility. In addition, several 

wheelchair-bound residents expressed a desire to obtain adaptive equipment to make it 

ated that they

would take these concerns under advisement. 

acility caseworkers and CTO staff assisted in facilitating the discussions. The residents 

ded the first session, and 13 attended the second session. A number of 

nants expressed concerns about items in their individual units. The PAE and the owners 

eed to be addressed as “critical requirements.” It was 

ent in Year 1 of the 

Details of the M2M Restructuring 

Rent Levels 

Table 10 provides the rent levels pre- and post-M2M restructuring. 

Table 10. Rent Levels Pre- and Post-M2M 

particular, the residents stressed that they felt secure at Six Chimneys. A couple of 

cerns or issues were noted on the forms. A number of tenants wanted to know if the 

easier to open windows and adjust thermostats. Owner representatives indic

F

expressed general satisfaction with the data presented from the draft plan. Eleven 

residents atten

te

both concluded that these did not n

noted that several of these items were scheduled for replacem

replacement schedule. 

New Contract Rents Previous Contract Rents

Unit Type 

HUDEstablished 

FMRs 

PAE Market 

Rents Rent 

Rent as 

Percent 

of FMR Rent 

Rent as 

Percent of 

FMR 

Studio $483 $519 $519 107% $820 170% 

One-Bedroom $606 $599 $489 81% $898 148% 

Estimated Savings

osed restructuring is

581,071.00. This represents an estimated savings of $12,360.00 per unit over a 20-year 

On this restructuring, OMHAR has approved what is an unconventional M2M financing 

strategy. The proposed strategy is to essentially put nearly all the outstanding debt on the 

HUD-issued second and third mortgages. In particular, placing a comparatively large 

amount of the financing on the third mortgage may be an effective strategy for a 

nonprofit owner/operator. 

The projected savings to HUD over 20 years for the prop

$

timeframe. 

Financing 

227 
Evaluation of Mark-to-Market Program Appendix C

The details of the approved financing are as follows: 

The proposed first mortgage note is to be in the amount of $117,100.00. Anticipated 

hey may 

A second mortgage for $578,000.00 at 1.0 percent and a 30-year term. 

• 

Thi n the

exis

Re

Only two items were proposed as immediate rehab requirements. These were: 

• Installation of Braille elevator instructions at 4 locations: $1,200.00. 

• Replacement of one heating boiler: $27,500.00. 

Total 12-month rehab costs were $28,700.00 or $624.00 per-unit. 

Outcomes for Tenants 

The successful conclusion of a restructuring plan for Six Chimneys represented a major 

benefit for the tenants. In development of the plan, the underwriter employed extremely 

conservative estimates to ensure an adequate “cushion” to continue operations. On 

standard measures, the DSCR ratio for this refinancing approximates 1.6. 

Given the limited housing options for this tenant population, it appears to be an 

appropriate programmatic goal to structure the agreement to ensure maintenance of this 

property. In particular, this is a population where the use of vouchers would appear to be 

inappropriate. 

Viability of the Project after M2M Restructuring 

As mentioned above, the financing strategy for this property appears designed to ensure 

the continuing operation of the program. The only caveat is any uncertainty concerning 

the ongoing funding of service provision by the State and local health agencies. 

•

rate is 6.75 percent with a 30-year term. (The nonprofit owner indicated that t

be able to self-finance the new first mortgage.) 

•

A third mortgage for $1,213,245.00 at 1.0 percent and a 30-year term. 

s refinancing strategy would result in a partial claim payment of $1,501,527.00 o

ting note.

novation Items and Costs

228 
Evaluation of Mark-to-Market Program Appendix C

Lessons Learned from This Site 

Lessons learned from th

• The M2M process has enough flexibility to design a refinancing strategy for 

properties with unique requirements. Such strategies may be particularly appropriate 

when dealing with nonprofit owner entities. 

the restructuring, the focus of negotiations may have been too narrow. 

otiations were carried out efficiently, following OMHAR guidelines.

n

is site include:

• In the case of

All of the neg

However, all the data collection efforts focused on mortgage-related issues. The 

service component of the property’s operations was not really addressed in the 

restructuring process. This may have been a case where “partnering” arrangements 

could have been discussed. This might represent a missed opportunity to provide eve

greater benefits to this tenant population. 

229 
Evaluation of Mark-to-Market Program Appendix C

Case Study Eleven: 

The Sneedville Garden Apartments are located in Sneedville, Tennessee. The property is 

comprised of 10 one- and two-story structures with a total of 40 apartment units. Twentyfour units are one-bedroom, and sixteen units are two-bedroom. The complex was 

constructed in 1979 under the Section 8 New Construction program, and has the gardenstyle appearance of many of the Section 8 properties constructed in the 1970s and 1980s. 

There is a leasing office in a separate building. 

Sneedville, Tennessee is an isolated, small rural township approximately 80 miles 

ortheast of Knoxville. Only two two-lane roads that rise over several large mountain 

n is a service center for the immediately 

rrounding agricultural community where livestock (cattle and horses) are raised and 

here is a limited amount of industry in Sneedville. Surprisingly, for this portion of the 

B

ate

been under the same ownership and identity-of-interest 

been

study. A

ants

the first 12 months of the restructuring agreement. 

Sneedville Garden Apartments 

Sneedville, Tennessee—Full Restructuring 

The Property, Neighborhood, Housing Market, 

and Financial History

The Property

n

passes access the community. The tow

su

grains are grown commercially. Tobacco production also remains an important part of the

local economy. 

T

lue Ridge Mountains, there is little tourist or commercial recreational activity in the 

immediate area. The low level of economic activity in Sneedville is in stark contrast to 

towns such as Morristown that are only 30 miles away, but adjacent to a major interst

highway. 

The Sneedville tract that contained the property had a high poverty rate of 43.6 percent in

the 2000 Census. The population for the tract was 96 percent non-Hispanic white. 

The Sneedville property has

management group since its construction in 1978. The same property manager has

in her position since the property was opened. Vacancy rates have been consistently low, 

and the property was 100 percent occupied at the time of the site visit for this

high proportion of the tenants appear to be long-time residents. Two of the ten

interviewed had been resident at the property for over 10 years. There is normally a 2- to 

4-month waiting list to obtain a unit at Sneedville Gardens. 

The Sneedville property appears to have been well maintained since its construction. The

Physical Condition Assessment noted only a few minor repair needs. At the time of

closing, the OMHAR restructuring agreement provided no funding for any critical repair 

needs in

230 
Evaluation of Mark-to-Market Program Appendix C

The Neighb

enter. Many of the

cond story units have dramatic views of the several river valleys that lead into 

tely adjacent

th ily 

ultifamily 

rop

e

As

listed in the 2000 Census at 70.8 percent. The rental vacancy rate is listed in the census 

data as a lo 5 ithin

Sneedville e elatively

large numb r ( all of

these properties appear to be drawn from

of these tenants had lived in sub-standard rural housing prior to obtaining a unit in one of 

thes p

Financ

s note till owned and managed by the company that developed 

e of this property had

en

e firm

ca

r g

h ior partners of the firm

o underwriting experience in the

og

est d-party vendors, and the facilitation

f tenant meetings. There was no “farming out” of any restructuring functions. 

e of the project data collection, Foley and Judell had completed over 50 M2M 

structurings. At that time they were averaging four to five active cases in a given 

month. 

orhood

The Sneedville property is located on a hilltop overlooking the town c

se

Sneedville, and the next ridge of mountains. Most of the structures immedia

to e Sneedville property are old (pre-1940), but well-maintained single-fam

residences. One side of the Sneedville property does abut a Public Housing m

p erty. Another side of the property is at the base of a small, undeveloped hill. 

Th Housing Market

is common in small communities, the home ownership rate in Sneedville is high,

w .2 percent. By all indications the private sector rental market w

is xtremely limited. For such a small community, Sneedville has a r

e 6) of subsidized multifamily properties. The majority of tenants in

 the immediately surrounding rural areas. Many 

e roperties.

ial History of the Project 

A d above, the property is s

it in 1978. All indicators showed that the past financial performanc

be highly satisfactory.

The Participating Administrative Entity (PAE): Foley and Judell 

Th PAE selected for this restructuring transaction was Foley and Judell, a law

lo ted in New Orleans. As a law firm, Foley and Judell is unique among the PAEs 

working in the M2M program. However, Foley and Judell had considerable experience 

wo king in the housing market, both public and private. In particular, the firm had a lon

history of providing legal advice on bonds issued for public sector properties, both 

commercial and residential. 

W en the M2M program began operation in 1998, the sen

rec gnized a market opportunity to use their considerable

pr ram. A separate unit was created at the law firm devoted solely to M2M 

restructurings. This unit of the firm provides all services required for a M2M 

r ructuring, including underwriting, selection of thir

o

At the tim

re

231 
Evaluation of Mark-to-Market Program Appendix C

Milestones in the M2M Restructuring Process 

The following are key milestones in the M2M restructuring process: 

• The Sneedville property was first referred to OMHAR in May of 2002.

y and Judell on July 16,

2002. While the PCA indicated that the property was in good to excellent condition, 

an August 23, 200 ental 

concerns identified by the engineers. These included: 

• No certification that the electric transformers were PCB-free. 

-based paints.

• There was some indication that the property could have asbestos 

The owner w ired to develop a

detailed h dressed. Th was notified th

turing ent w t be ped ese c ns wer

rily sed.

• itted on August 9, 2002. 

ting was held on July 17, 2002. (See the Tenant Involvement 

section below for details.) 

dressed by January 2003.

structuring plan was submitted to OMHAR for review in February, 2003. 

d tenant meeting was held on May 6, 2003. 

• The final restructuring commitment was submitted to the owner on June 27, 2003, 

with an anticipated closing date of July 30, 2003. 

Final negotiations on details of the restructuring pushed the closing date back to 

• In June of 2002 the property was referred to Foley and Judell, the PAE. 

• A Physical Condition Assessment was submitted to Fole

2 communication to the owner indicated some environm

• No certification that the property was free of lead

containing materials. 

as requ

ow these conc

agreem

an Operations and M

e owner

until th

intenance Plan that

at a

e

erns were ad

restruc ould no develo oncer

satisfacto addres

A rent comparability study was subm

• The first tenant mee

• The above-listed concerns were satisfactorily ad

• A draft re

• The draft restructuring commitment was submitted to the owner for review in April, 

2003. 

• The secon

• 

September 13, 2003. 

232 
Evaluation of Mark-to-Market Program Appendix C

Tenant Involvement in the M2M Restructuring 

Eight tenants attended the first tenant meeting on July 17, 2002. The tenants indicated 

general satisfaction with the property management. Several tenants indicated a desire to 

btain new appliances or new fixtures for their apartments. 

ix tenants attended the second tenant meeting in May 2003. The tenants were informed 

greement included no immediate enhancements to the 

roperty. No dissatisfaction was expressed with this result.

Levels

turing.

o

S

that the draft restructuring a

p

Details of the M2M Restructuring 

Rent

Table 11 provides rent levels pre- and post-M2M restruc

Table 11. Rent Levels Pre- and Post-M2M 

New Contract Rents Previous Contract Rents

Unit Type 

HUDEstablished

FMRS 

PAE Market 

Rents Rent 

Rent as 

Percent 

of FMR Rent 

Rent as 

Percent of 

FMR 

One-Bedroom $297 $350 $354 119% $474 150% 

Two-Bedroom $375 $489 $438 117% $555 148% 

Three-Bedroom $491 $525 $438 89% $681 138%

Est

The approved Exception Rents result in a net loss to HUD of $44,441 at Net Present 

alue. This represented a per-unit loss of $871.39.

Fin

The ed

for laim on the existing mortgage of $1,110,568.38. This was on an 

Unpaid Balance of $1,281,312.38. Total transaction costs for the restructuring were 

$98,947.00. 

The new mortgages are: 

• A new first mortgage with a balance of $250,000.00, a rate of 6.0 percent and a term

of 30 years. 

• A second mortgage of $675,000.00, with a rate of 1.0 percent and a term of 30 years. 

• A third mortgage of $435,568.38 set at a rate of 1.0 percent and a term of 30 years. 

imated Savings

V

ancing

refinancing package set up was a standard M2M arrangement. The package provid

a partial payment of c

233 
Evaluation of Mark-to-Market Program Appendix C

The restructuring agreement required an annual Reserve for Rehabilitation deposit of 

$30,000.00. 

Renovation Items and Costs 

A 12-month

Tenants

Sneedville

he

r to

e

mountains adjacent to 

of

rehabilitation package was not developed for this property. 

Outcomes for

The major outcome for the tenants at this property is retaining the property in the Section 

8 program. This appears to have been an extremely well-managed property. In addition, 

there is a definite, continuing need for good-quality affordable housing in the

area. 

Viability of the Project after M2M Restructuring 

There is an extremely high probability that this property will be financially sound for t

foreseeable future. 

Lessons Learned from This Site 

The primary lessons learned at this site include the following: 

• The presence of Section 8 housing in small isolated rural communities does appea

meet a genuine housing need for a low-income population. A high proportion of th

tenant population had come from isolated areas in the

Sneedville. For some of these tenants, particularly the elderly tenants, the Section 8 

housing represented a significant upgrade in the quality of their housing. 

• A M2M refinancing arrangement still provides major incentives for an owner who 

has made a reasonable investment over time in the project. In the case of Sneedville, 

the restructuring was an improvement over the existing debt servicing of the owner. 

In addition, the restructuring enabled the owner to pay off a significant amount

short-term payables. 

234 
Evaluation of Mark-to-Market Program Appendix C

Case Study Twelve: Winthrop Apartments 

Tacoma, Washington—Full Restructuring 

The Property, Neighborhood, Housing Market, 

and Financial History

The Property

Winthrop Apartments is located in the downtown commercial core of the central business

istrict of Tacoma, Washington, a medium-size city in the Pacific Northwest 

south of Seattle. Tacoma, a former timber mill town and 

undergone a downtown revival over the past 10 years. Winthrop 

as a

ogram. 

he property has been owned by Conifer 116, a limited partnership, for the past 10 years. 

e of the three General Partners.

The property consists of 194 residential units—72 studios, and 122 one-bedroom units—

as well as ground level common space and retail space. Of the total residential units, 174 

are assisted with Section 8 subsidies. All except six units were rented and occupied at the 

time of the site visit. Those six units were undergoing replacement of plumbing and so 

were not in service. The property had 67 people on the waiting list. The current contract 

administrator for the Section 8 program is the Bremerton Housing Authority. The 

property currently houses small families as well as elderly and disabled tenants. 

he units are very small on average and are categorized as small and large studio 

large one-bedroom units. The small studios average only 233 

dios averaging about 338 square feet. Small one-bedroom

e

ator

In addition to the residential space, there is substantial commercial and community space 

on the ground floor. The commercial space generates income to the property and includes 

d

approximately 35 miles

transportation hub, has

is a 12-story, 194-unit apartment building that was originally constructed in 1924

hotel. As such, it would be considered an older subsidized property in the M2M pr

The building is constructed of steel and cast-in-place concrete, with a combination of 

brick and terra cotta tile veneer, giving it a classical appearance. 

The building was rehabilitated in 1972 by a previous owner under the Section 8 program.

T

There are three General Partners in Conifer 116: Conifer Developments, Inc., P&R 

Investment Services, and Paul Pfleger. Conifer Development, Inc. is the Managing 

General Partner. Conifer Management, Inc. is the property manager for Winthrop 

Apartments. Both Conifer Development and Conifer Management are owned by Mr. 

Allen Hanson, who is on

T

apartments, and small and

square feet, with large stu

apartments are 408 square feet, with the larger one-bedrooms averaging 611 square feet. 

The Physical Condition Assessment described the property as being in good-to-fair 

condition with respect to the major structural and mechanical systems, but did note som

significant deferred maintenance. These items primarily included plumbing and elev

machinery that require replacement or upgrade. REAC inspection scores were 44 in 1999, 

89 in 2000, and 77 in 2002. 

235 
Evaluation of Mark-to-Market Program Appendix C

roughly 16,000 square feet of retail space, and a 4,200-square-foot ballroom that is rented

for events. In addition, there are roughly 10,000 square feet of common and circulation 

space including front offices, laundry facilities, a small chapel, a small tenant-run stor

and a kitchen area that is used for regular coffee socials. A major limitation to the 

building is its lack of on-site parking. However, the opening of the new light rail line 

should help alleviate some of the transportation problems related to the limited parking

e,

.

ccording to the 2000 Census, the property is located in a very low-income census tract, 

2000 Census also indicated that Winthrop is 

cated in a tract that is roughly 60 percent white, 16 percent black, 10 percent Asian or

he central business district in which the project is located has been undergoing

t

gram for multifamily housing 

evelopment. Several new museums, renovated theatres, the Convention Center, and a 

rev n

for

ants. The

inthrop 

d

A

with a poverty rate of 47 percent. The

lo

Pacific Islander, 8 percent native American or multiracial, and 6 percent Hispanic. 

The Neighborhood 

T

revitalization efforts for the past several years. The building is located at the west 

terminus of a new light rail line, which runs through downtown, and connects to both a 

branch campus of the University of Washington, Tacoma, and to a heavy rail system tha

runs to other cities to which residents commute. This light rail line is just one aspect of

the significant public and private investment in the business district in the past ten years. 

Several residential housing projects have been built in this area, encouraged by both the

city government and the State’s property tax exemption pro

d

italized industrial district have enhanced the desirability of the downtown as a locatio

living and working.

Winthrop Apartments is located near a variety of small retail stores and restaur

surrounding area appears well maintained, and the streets and sidewalks are in good 

condition. Only one small building was boarded up; otherwise, the surrounding 

commercial spaces were all occupied. Winthrop is also located near an area called 

Antique Row, which includes many small antique shops. As noted above, the 

neighborhood also boasts of several desirable features within several blocks of W

that should have a positive impact on rents, including the light rail line, museums, 

University of Washington (Tacoma campus), and theaters. 

The Housing Market 

According to Depre and Scott Apartment Advisors, Inc., Winthrop Apartments is locate

within the north-Tacoma market area, but a significant portion of greater downtown is 

located within the mid-Tacoma market area. Analysis of these two market areas shows

that vacancy rates rose between 1990 and 1996, at which point they reached a high 

averaging more than 7 percent. This was followed by a general decline, reaching a low in

2000 of less than 2 percent. 

236 
Evaluation of Mark-to-Market Program Appendix C

In comparison, the 2000 Census for the property’s tract recorded a rental vacancy rate of

9 percent, down from a rate of nearly 17 percent in the 1990 Census. One ex

the low vacancy rate in 2000 was the dot.com boom and the related establishment of 

many start-up firms in downtown Tacoma. With the recent bust of this industry, rates 

have started rising again. However, continuing efforts by city planners to establish the 

downtown as a destination for employment, an economic center and an entertainme

district should positively impact vacancy rates. 

planation for

nt

inancial History of the Project 

he project w m in 1972 

dies under the Loan

anagement Set Aside program. Of the total 194 residential units, 175 are assisted with 

he

typical for an older subsidized property. The unpaid balance on the note was $1.3 million 

as of April 2003, at an interest rate of 7 percent. Debt service coverage ratio for the last 

ree audits has averaged just below 1.0. Expenses have risen significantly over the past

destly. One reason for the increase in

p

throughout the country since the events of September 11, 2001. Deferred maintenance 

has continued to accrue on the property during this period. 

T

HU

Consolidated Housing Authority, a public PAE and county housing authority located in 

eighboring Silverdale, Washington. Kitsap County has been one of the more active 

housing authority also has a contract with HUD to be a private PAE to handle 

structurings outside of the State. The authority has performed restructurings in 

ing restructurings in Nevada and

ah

As ly

alf e in as 

Fulls, but were completed as Tier II Lites. In fall 2003, the organization was currently 

responsible for about 21 M2M deals in progress, all of which were Fulls. The PAE has a 

small, internal staff (four to five people) that performs the restructuring work with the 

xception of closings. The authority has entered into an agreement with Heskin-Signet, a 

pro

F

T as converted to FHA-insured housing under the 221d (3) progra

when it was rehabilitated. At that time it also received Section 8 subsi

M

Section 8 subsidies. The other 19 units are rented at market rates. 

T financial history of Winthrop Apartments would probably be considered rather 

th

three years, while rental income increased more mo

ex enses is a large rise in insurance premiums, which have generally increased 

he Participating Administrative Entity (PAE): Kitsap County

Consolidated Housing Authority

D referred the restructuring of Winthrop Apartments to the Kitsap County 

n

public PAE’s in the M2M program. In addition to being a public PAE for the State, the 

re

California, Oregon, and Arizona, and is currently manag

Id o.

of fall 2003, the PAE had completed about 30 M2M restructurings, of which rough

h have been Fulls, and half Lites. Many of the restructurings reportedly cam

e

private PAE, to handle all closing work, and with Resnik Fedder to handle overflow of 

projects. At the time of the site visit, the latter was managing the restructuring of 10 

perties in two other States that were referred by this PAE.

237 
Evaluation of Mark-to-Market Program Appendix C

The

ver

adm

and rs

e federally-funded Self-Help Housing Program of the Rural Housing and Community 

Developmen ed to

xpand afford heduled to

become the contract administrator for all M2M properties in Washington State. 

Milestones in the M2M Restructuring Process 

The following are key milestones in the M2M restructuring process: 

• OMHAR assigned Winthrop Apartments to the Housing Authority in January 2003, 

and the PAE accepted shortly thereafter. 

A)

• The appraisal was completed on April 1, 2003. 

nd asbestos-wrapped pipes. At the same time they 

were working on developing rent comps and developing OMHAR’s rent matrix. 

eeting in the Ballroom at the project on March 

See the Tenant Involvement Section below for details.) 

OMHAR in a timely fashion. As of mid-October, 2003, the plan had still not been 

approved by OMHAR. 

• The PAE was working on addressing several concerns expressed by OMHAR during 

its review. The key issues of concern to OMHAR included the following: 1) noncompliance with lead-based paint mitigation; 2) the vacancy factor and why Winthrop 

held six units vacant for so long while, at the same time, arguing that there were 54 

housing authority is managed by a six-member Board of Commissioners, and has a 

y active Executive Director. The Authority's activities primarily involve 

inistration of various Federal housing programs, including low-rent Public Housing 

the Section 8 Housing Assistance Payments Program. The Authority also administe

th

t Services (RHCDS), and operates several other programs design

e able housing opportunities. On August 1, Kitsap County was sc

• The PAE ordered the third-party appraisal and physical condition assessment (PC

on January 28, 2003. 

• The physical condition assessment was completed on March 7, 2003. (See 

Renovation Items and Costs below for details.) 

• The PAE provided comments on the appraisal and PCA. At the time of the site visit

in June they were working to determine how much plumbing rehab was necessary 

and what it would cost. The PAE was also grappling with the need for and possible 

expense of abating lead paint a

The PAE conducted the first tenant m

19, 2003. (

•

• A second tenant meeting was held on August 12th. 

• The draft restructuring plan was submitted to OMHAR on August 21, 2003, after 

refinement of data about repair work to be done at Winthrop Apartments. 

• All of the above issues resulted in delays to the timetable for submitting a plan to 

238 
Evaluation of Mark-to-Market Program Appendix C

people on the waiting list; 3) estimated cost of the plumbing repairs and a request for

greater detail on the nature of those repairs; and 4) questions about whether the rent 

as they are above comparable rents. In 

addition, the OMHAR reviewer wanted to s of t

Tenant Involvement in the M2M Restructuring 

Prior to the first tenant meeting on March 19, 2003, the PAE sent notice to all residents, 

a s to solicit resident o s regarding the condition of their

of lding. 21 re were present fo eeting, which 

as led by a staff member of the PAE. In addition, a second PAE staff person as well as 

the project’s on-site manager was present for the meeting. Issues raised by tenants at the 

eeting included the plumbing problems, problems with the elevators, and security 

during

uestions and concerns were also raised

garding the possibility that the building might be converted to condominiums. 

t the second tenant meeting, held on August 12th, there were 15 tenants in attendance, 

oncerns about having to move out of their units during the time rehab work was being 

id

not

stai ire. Other tenants wanted to know if

rents were going to be affected, and when the Housing Authority would know whether 

Details of the M2M Restructuring 

ent levels

throp that are roughly 109 percent

igher than the market-determined rents, and 106 to 114 percent above current contract 

se exception rents, however, are 91 to 95 percent of

HUD’s FY 2004 Fair Market Rents for the County). This would result in an estimated 

0

levels proposed by the PAE may be too high,

review copie he commercial leases. 

which included urvey pinion

apartments and the bui About sidents r the m

w

m

concerns. 

Tenants also indicated concerns regarding the type of disruptions that could occur

the renovations and whether relocation, especially outside of the building, would be 

necessary during rehab of the plumbing. Q

re

A

along with the on-site resident manager. As at the first meeting, tenants expressed 

c

performed. They also wanted to know what the worst-case scenario might be if HUD d

approve the restructure plan. A handicapped tenant asked about handicap ramps at 

rways for access out of the building in case of f

the restructure plan was approved. 

R

The PAE is recommending exception rents for Win

h

rents, depending on unit size. (The

$78,000 of higher annual Section 8 expenses relative to pre-restructure rents, or $900,00

of higher expenses in estimated net present value terms over 20 years. 

239 
Evaluation of Mark-to-Market Program Appendix C

Table 12 provides rent levels pre- and post-M2M restructuring. 

Table 12. Rent Levels Pre- and Post-M2M

New Rents Previous Contract Rents

Unit Type 

HUDEstablished 

FMRS 

PAE Market 

Rents Exception 

Rent 

Exception 

Rent as 

Percent of 

FMR Rent 

Rent as 

Percent of

FMR 

Zero-Bedroom $463 $385 $419 91% $367 79% 

One-Bedroom $553 $480 $523 95% $494 89% 

Estimated Savings 

The current structure would result in an estimated loss to government of $1.2 million as

result of the restructuring. One reason for the high anticipated loss is higher rents. Kit

County presented its Full restructuring plan to OMHAR on August 21, 2003. It is 

currently under review by OMHAR and is likely to u

a

sap

ndergo substantial scrutiny during

is process, given these projected losses.

inancing

and

CR of 1.68 at the proposed rents.

• A second mortgage e of 4.3 percent and

amortized over 30 years. 

• No third mortgage is recommended. 

The PAE has reportedly been in contact with GMAC Commercial Mortgage Corporation 

regarding the financing of the new first mortgage. 

Renovation Items and Costs 

The PAE’s initial plan for rehabilitation identifies nearly $900,000 in short-term repair 

needs. Three significant rehabilitation items included in the plan by the PAE are the 

following: 

• Major plumbing repairs: $365,000. 

• Elevator upgrades: $279,000. 

th

F

The terms of the debt restructuring include the following proposed mortgage terms: 

• A first mortgage in the amount of $1,258,000 insured under Section 223(a)(7)

amortized over 30 years at an interest rate of 6.5 percent plus 0.5 percent MIP. This 

reflects a DS

in the amount of $1,257,927 at an interest rat

• 450 fire-rated corridor doors and hardware: $100,000. 

240 
Evaluation of Mark-to-Market Program Appendix C

The initial plan includes a contribution from the owner of 20 percent of the costs of

rehabilitation as well as closing costs. As a result, the owner will have to put nearly 

$228,000 into the project. 

The PAE is also recommending an initial deposit of $393,567 to the reserve for 

replacement account in order to reduce ongoing annual contributions and provide a better 

reserve balance for replacing items during the first 10 years when it is needed.

and improved reliability. Lastly, fireproof corridor doors 

ould improve safety for residents, should a fire break out in the building. Potential 

dislocation may result from improvements in the plumbing, since repairs may require 

demolition of existing walls to address the problem. 

Viability of the Project after M2M Restructuring 

The long-term outlook for this property appears good, if the required repairs and reserve 

for replacement are adequately funded. This is especially true given the high 1.68 DSCR. 

The good location of the property will support a strong demand for affordable housing in 

the area, especially given the convenient location to the light rail line. The major 

limitation of the building—on-site parking—will continue to limit its ability to convert to 

alternative use. 

Lessons Learned from This Site 

Perhaps one of the most important lessons from this site is that although it has rents at or 

below market rents, the property still requires a restructuring of its mortgage in order to 

fund substantial rehabilitation needs and assure adequate funding for its Replacement 

Reserves. While the M2M program was meant to address FHA projects whose rents are 

above market, there appears to be a need for HUD to examine and address the problems 

of older projects like this one. At this property, the PAE is using exception rents to make 

the project financially viable and to address the backlog of much-needed major repairs 

and replacements. 

Despite the high rental vacancy rate for the area, it may still be cost effective to retain this 

property as affordable housing, since the proposed exception rents are below the most 

recent FY 2004 Fair Market Rents for the area, making vouchering-out a more expensive 

alternative than restructuring. 

A second lesson relates to the fact that the owner, the PAE, and HUD want to maintain 

this property as affordable housing, despite the apparent desire of city economic 

development planners to have a different use for the building. In conversations with the 

Outcomes for Tenants 

If HUD agrees to the proposed improvements, the quality of living for tenants should be 

significantly improved. Long-term plumbing problems will be resolved, increasing the 

reliability of water provision in the building. Also, enhancements to elevators will reduce

the frequency of breakdowns

sh

241 
Evaluation of Mark-to-Market Program Appendix C

analyst for this study, staff of the City Economic Development Department indicated that 

the city would prefer to have a different and higher end use for the property, either as 

market rate rental, ver, the current

M2M process does not seem ent to have 

input into the restructuring plan or the decisions on the future use of the property. 

Exceptions to e HAP, or

if the PAE is a public PAE co

at may be drawn from this site is an indication that public PAEs are more 

help

a mixed-income rental, or some alternative use. Howe

 to allow for an opportunity for local governm

this can occur when a unit of the local government administers th

nnected with the locality.

A third lesson th

likely to “go the extra mile” to preserve subsidized housing than private PAEs. This 

particular restructuring has required more time than the average restructuring to resolve 

some thorny rehab and rent issues. However, the PAE has taken the time needed to

resolve those issues. A private PAE may have cut its involvement and simply completed

this as a Watch List project. 

242 
Evaluation of Mark-to-Market Program Appendix C

Case Study Thirteen: Valley Heights Apartments 

Quincy, California—Full Restructuring 

The Property, Neighborhood, Housing Market, 

and Financial History

The Property

Valley Heights Apartments is a 48-unit property located in the city of Quincy (populati

1,879) in Plumas County (population 20,824) California. Quincy is located in the 

American Valley against the western slope of the Sierra Nevada range. It is the largest 

community in, and county seat for Plumas County. Quincy is located approximately 110 

iles northwest of Reno, Nevada, and about 80 m

on

iles directly north of the Lake Tahoe 

, laundry facility, and maintenance shed. 

property has been owned by a California for-profit partnership.

eloped with the expressed purpose of acquiring real property in 

he

ia

y

irector of the property management firm.

ar

lumas County and the American Valley remain relatively isolated parts of the “High 

in 

m

basin. 

The property was constructed in 1982 under the Section 8 New Construction program. It

consists of nine two-story wood frame buildings. There are 24 one-bedroom, one-bath 

units, with 597 square feet; 20 two-bedroom one-bath units with 752 square feet; and 4

three-bedroom, one- and one-half-bathroom units with 1,010 square feet. One of the 

three-bedroom units is occupied by the manager and is not included in the Section 8 

contract. One building contains an office

Since its construction the

This partnership was dev

Quincy, California. The General Partner holds a limited interest (5 percent) while t

seven Limited Partners have greater share holding (10-20 percent). A northern Californ

property management firm has managed the property since its construction. An identit

of interest exists. The general partner of the ownership entity is a shareholder and a 

d

The Physical Condition Assessment (PCA) conducted on the property noted no major 

structural defects. The PCA did note water damage to some of the bridges between the

units. The recommendation was to replace the original wood slats with rot-resistant ced

or redwood slats. 

Census data for Quincy lists the poverty rate at a low 10.2 percent. Nearly 90 percent of 

the local population is classified as non-Hispanic white, with Hispanics being the largest

minority at 5.2 percent of the local population. 

P

Sierra” region. Plumas County shows little of the tourism-driven development that has 

taken place in other “High Sierra” towns such as Truckee. In and around Quincy the ma

sources of employment remain logging, ranching, and farming. 

243 
Evaluation of Mark-to-Market Program Appendix C

The one exception to these traditional industries is Feather River Community Coll

located in Quincy. Until relatively recently, Feather River was a small California 

community college that drew students by offering unique cou

ege,

rses (e.g., horse training). In

e last several years the College has become much more aggressive in recruiting 

us of this marketing strategy has been a heavy emphasis on 

tercollegiate athletics. The College now has competitive baseball, basketball, and 

nomenon (the last 3 to 5 years) that students are a high 

roportion of the tenants at Valley Heights. Prior to that time the Village Heights 

property had vels of

drug use among the tenant population, with police visits to the property not being 

ncommon. In the last sever has successfully addressed

The Quincy area is characterized by a relatively high rate of home ownership (60 

Although there is not a large am

not particular $10 per

hour. This ha uincy,

 will make them

y of residents at

hese

erty

t v there is a one-to-three

onth waiting list to obtain a unit. The student/athletes indicated that there is a network 

o

The

hou

stru

the ollege has been involved in the

th

students. A major foc

in

football teams. 

It is a relatively recent phe

p

a poor reputation in the community. There were reports of high le

u al years the property management

this problem. 

The Neighborhood 

The Valley Heights property is located on a slight rise above the main commercial road

that runs through the town of Quincy. There are no immediately adjacent residential or 

commercial areas. The backside of the property is at the base of one of the smaller 

mountain ridges that encompass the American Valley. The front units of the complex,

particularly the second-story units, have a spectacular view of the entire American Valley 

and the next major ridge of the Sierras. 

The Housing Market 

percent). The number of rental properties in the immediate vicinity is limited, and the 

quality varies significantly. The rental vacancy rate provided by census data is 7.3 

percent. 

ount of economic development in Quincy, wage rates are 

ly low. Wages for retail and service jobs run in the range of $8 to

s an impact on the potential tenant base for Village Heights. In Q

individuals with normally low-wage positions often find their income

ineligible for Section 8 housing. For the last several years, the majorit

Village Heights have been students at Feather River Community College. Many of t

students are on one of the school’s athletic teams. The tenant base has kept the prop

a irtually full occupancy for the last several years. Normally

m

am ng the teams that allows athletes to know when there is an opening at the property. 

re are limited opportunities for the tenant population to obtain comparable low-cost

sing in the community. Many of the rental units in Quincy proper are old, rural 

ctures, often in poor repair with inadequate heating for the severe winter weather of 

High Sierras. Recently, the Community C

244 
Evaluation of Mark-to-Market Program Appendix C

developme a

However, the C nt these units at rates that are three to four times 

what eligible students are required to pay at Valley Heights. 

inancial History

This property consistently scored highly on financial management. However, REAC 

scores and evaluations over the last several years expressed concerns about the adequacy 

f maintenance reserves. 

HU

Sig jor 

role

experience in public/private partnerships dealing with distressed properties, and played a 

major role in handling distressed properties for the Resolution Trust Corporation 

TC)—the government vehicle for dealing with individual properties formerly handled 

erties,

Hes

The

dist

faci

per

At

rest e

tim

pro

Milestones in the M2M Restructuring Process 

The following are key milestones in the M2M restructuring process: 

• Valley Heights was referred to OMHAR on May 16, 2002, with OMHAR then 

referring the property to Heskin-Signet on June 13, 2002. 

• The Phys mpleted in 

the fall of 2002. The Draft Restructuring Plan was submitted to OMHAR on 

is

nt nd leasing of several multi-unit properties adjacent to the campus. 

ollege is attempting to re

F

o

The Participating Administrative Entity (PAE): 

Heskin-Signet Partners 

D referred the restructuring of Valley Heights to Heskin-Signet Partners. Heskinnet is a private Participating Administrative Entity (PAE), one that has had a ma

in M2M restructurings across the country. Heskin-Signet has considerable

(R

by failed Savings and Loan institutions. In addition to working with distressed prop

kin-Signet provides consulting services to private-sector real estate developers.

senior staff at Heskin-Signet has experience going back to the 1980s dealing with

ressed properties. None of the restructuring functions required by OMHAR, such as

litation of tenant meetings, is “farmed out” by Heskin-Signet. All functions are 

formed by Heskin-Signet staff. 

the time of the Valley Heights restructuring, Heskin-Signet had completed over 300 

ructuring agreements for OMHAR. This included over 100 Lite restructurings. At th

e of the Village Heights process, Heskin-Signet had approximately 80 to 90 M2M 

perties in various stages of restructuring. Of these, only three were Lites.

ical Condition Assessment and a Third-Party Rent Study were co

December 15, 2002. This Plan remained substantially the same until the final 

restructuring agreement was reached. However, the Plan involved several layers of 

OMHAR, including a Loan Committee Review at the Chicago OMHAR Office. Th

review was due to two factors, namely: 

245 
Evaluation of Mark-to-Market Program Appendix C

• The Draft Plan proposed exception rents that were above Fair Market 

Rents and market rents. 

• The financial plan projections indicated a total loss of $729,338.00 over 

the cou

• At the conclusion of this review process, OMHAR judged that the property was 

preservation worthy and a Restructuring Commitment was sent to the Valley Heights 

Limited Partnership on April 7, 2003. 

the strong support of the Plumas Count

administers appro

approximately 200 applicants. The Authority admin 4 HUD low-re

its wi erall ncy r 10 , an 45 a

g lis e are a o USD ral pment multifamil

properties (one el nd on ly) in y of y, both with an ov

te of rcent a th bot erti taini ve wai

lists. 

As required, the Plan’s request for Exception Rents was supported by a Rental 

tively high

ent of the county’s population falling

below the poverty line. The second was the static nature of the local economy and, 

ly the housing market. As noted above, all subsidized housing in the local 

area has virtually 100 percent occupancy, with significant waiting lists. Interview data 

n 8

vouchers. However, the static nature of the local economy and housing market made 

Originally, the closing for Valley Heights was scheduled for June 15, 2003. The 

. This final delay in completing the 

restructuring resulted from a need to obtain clarification on a California code 

regulation requiring bathroom facilities in the management offices. Once the 

necessary clearance was obtained, the Restructuring Agreement was implemented. 

t Involvement in the M2M Restructuring

The tenant involvement in this process was limited. The initial tenant meeting was held 

on August 1, 2002, with no attendees. The second tenant meeting was held on January 

16, 2003 with a total of 34 attendees. Attendee input at that second meeting indicated 

n anagement and with the proposed rehab 

rse of the restructured agreement. 

• The main factor in contributing to OMHAR’s approval of the restructuring plan was 

y Housing Authority. That authority

ximately 335 Section 8 vouchers with a waiting list of 

th an ov

isters 11

0 percent

nt Public

Housing un occupa ate of d with pplicants

on the waitin t. Ther lso tw A Ru Develo y

derly a e fami the cit Quinc erall

occupancy ra 98 pe nd wi h prop es main ng acti ting

•

Assistance Assessment Plan, drafted in November 2002. That Plan focused on two 

key factors in supporting the request for Exception Rents. One was the rela

level of poverty in the county, with 13.1 perc

particular

indicated that affordable rental properties in the immediate area were often below

acceptable standards. The RAAP noted that maintaining Village Heights as projectbased units would be more costly to the government than the issuance of Sectio

it highly unlikely that current residents of Valley Heights could find adequate, 

comparable, and affordable housing in the community. 

•

actual closing did not occur until August 24, 2003

Tenan

ge eral satisfaction with the property m

246 
Evaluation of Mark-to-Market Program Appendix C

enhancements contained in the Draft Restructuring Plan. Some tenants did make requests 

nts not included in the Draft Plan.

M2M Restructuring

b cturing.

for some minor physical enhanceme

Details of the

Rent Levels 

Ta le 13 presents the rent levels pre- and post-M2M restru

Table 13: Rent Levels Pre- and Post-M2M 

New Contract Rents Previous Contract Rents

Unit Type 

HUDEstablished 

FMRs 

PAE Market 

Rents Rent 

Rent as 

Percent 

of FMR Rent 

Rent as 

Percent of 

FMR 

One-Bedroom $406 $490 $561 138% $540 133% 

Two-Bedroom $522 $565 $665 127% $598 115%

Three-Bedroom $720 $680 $793 110% $686 88%

Estimated Savings 

Based on this rent schedule and projected costs, the OMHAR model estimates a total loss 

of ($729,338.00) over 20 years of operation. This equates to a per-unit loss of 

15,194.50) over the same 20-year timeframe. 

Financing 

• The first mortgage is $451,800.00 and was sized using exception rents with a 5 

percent/2 percent vacancy/bad debt factor, a 30-year term, 7.75 percent rate (inclusive 

of MIP), and a 1.36 DSCR. The UPB on the existing first was $1,441,614.00. 

• The second mortgage was sized using exception rents with a combined 3 percent 

vacancy/bad debt ratio, 30-year term, and 1 percent rate. The cash flow split is 75/25. 

The remaining balance is $979,605.00. 

re

• Replace Bridge Slats: $400.00. 

• Install Ceiling-Mounted Heater in Maintenance Shop: $300.00. 

• Route Bath and Hood Fan Ducts to Soffits: $4,800.00. 

• Add Attic Ventilation: $4,800.00. 

Replace Marlite Shower Surrounds: $16,000.00. 

($

• No third mortgage was included in the package. 

Renovation Items and Costs 

A total of $177,733.00 was allocated for the 12-Month Repair package. These funds we

allocated as follows: 

•

247 
Evaluation of Mark-to-Market Program Appendix C

• Replace Wood Trim: $7,200.00. 

• Replace Windows: $59,000.00. 

• Repair Parking Lot: $50,000.00. 

• Install Basketball Hoop: $2,000.00. 

• Erosion Control on Hillside: $15,000.00. 

• Insulate, Weather-Strip Attic Hatches: $900.00. 

e continuing

xpansion of the Community College, makes it likely that the property will remain at 

virtual 100 percent occupancy. In addition, the Plumas County Housing Authority had 

indicated an interest in acquiring the property following the completion of the 

restructuring. This interest indicates the authority’s judgment that the financial 

restructuring is viable over the long term. 

Lessons Learned from This Site 

The obvious lesson to be drawn from this site is that the M2M process can result in the 

actual raising of rent levels. The justification provided for this was the lack of affordable 

housing in an isolated community. The RAAP justification was not entirely convincing in 

demonstrating the continued need for this property. Given the projected cost to the 

government, this restructuring might have merited some type of special review by 

OMHAR. This analysis would need to factor in the appropriateness of maintaining the 

property when the primary beneficiaries are the tenants. 

Another lesson to be learned from this site is the factors that can “draw out” the 

restructuring process. From beginning to closing this restructuring took approximately 15 

months. This was somewhat longer than the “average” restructuring at the time of data 

collection, which was 11 months. 

• Handicap Transition Plan Modifications: $13,550.00. 

• Installation of Property Signs: $3,783.00. 

The owner’s contribution to this allocation was $39,101.00. The owner’s contribution to 

the “rehab” escrow was calculated as 20 percent of the total 12-month rehabilitation 

needs plus a 10 percent contingency fee.

Outcomes for Tenants 

The tenants should receive substantial benefits from this process. The 12-month “rehab”

package will address problems of deferred maintenance. Many of these maintenance 

problems are due to the severe High Sierra winter weather. In addition, preserving the 

property for the Section 8 program is a major asset for the Quincy community, which is

likely to have an extremely tight rental market for the foreseeable future. 

Viability of the Project after M2M Restructuring 

The approval of the Exception Rents augurs well for the long-term viability of the 

property. The waiting lists at all subsidized housing in the community, and th

e

248 
Evaluation of Mark-to-Market Program Appendix C

Two factors were primarily responsible for “drawing out” this process. First, right from

the initial financial analysis the PAE believed that exception rents were needed to 

preserve this propert

provide the data that could support an Exception Rent determ ately 

three months is

research. 

r was obtaining needed clarification on the applicable zoning regulations 

nager’s residence at the property. This issue came to light after the 

n 8 properties being considered a community asset. At Valley 

eights nearly three-quarters of the units were occupied by students attending the local

e

de

s of a low-income

y. This determination required a considerable amount of research to 

ination. Approxim

(September to November 2002) were taken up with conducting th

The second facto

regarding the ma

submission of the Restructuring Commitment to the owner in April 2003. The closing for 

the property was originally scheduled for June 15, 2003. Because of the zoning issue the

property did not close until mid-August, 2003. 

An additional lesson from this site concerns the Section 8 tenant populations. A common 

perception is that the tenants for Section 8 properties are drawn from the immediate 

community, the Sectio

H

community college. In all likelihood this should not be considered an aberration from th

proper Section 8 model. Nearly all of the students at Valley Heights were from outsi

Plumas County. The interview data indicated that many of them would not have been

able to attend the college without the availability of the subsidized housing at Village 

Heights. Thus the Valley Heights property has been serving the need

population, albeit that population may be transient and with expectations of major gains 

in income. In addition, given the importance of the Community College to the local 

economy, Valley Heights is a valuable resource for the general community. 

249 
Evaluation of Mark-to-Market Program Appendix C

Case Study Fourteen: Villa 14 Apartments 

Ault, Colorado—Full Restructuring 

perty, Neighborhood, Housing Market, 

and Financial History

.

ts

here is a fifth building on

munity room. There is a 

considerable amount of open space between the structures, covered by well-maintained 

lawns and shrubbery. 

ounty Colorado, a primarily rural county with a population of 

f is an extremely small agricultural service community 

and high schools.

ck

d

ese communities now have the feel of being far outer 

burbs of Denver with large numbers of new housing developments, malls, and 

increasing traffic. In contrast, Ault still retains the feel of a fairly isolated agricultural 

ommunity. 

ates. At the

At the time of the project site visit, the Villa 14 property appeared to be in extremely 

good condition. The lawns and shrubbery were in excellent condition, and the buildings 

The Pro

The Property

The Villa 14 Apartments is a four-building, 36-unit complex located in Ault, Colorado

The buildings are garden-style wood frame structures with brick siding. All of the uni

are single-story and two have handicap accessible features. T

the property which houses the Office, a laundry room, and a com

Ault is located in Weld C

under 250,000. Ault itsel

(population approximately 1,200), the most noticeable feature being the large grain 

elevators along the railroad tracks that bisect the town. There are few retail outlets in the 

town, but the town is the site of county grammar

The area immediately surrounding Ault is devoted to large commercial farming and sto

raising enterprises. There did not appear to be any large manufacturing or retail entities 

within a fifteen-mile radius of the town center. 

Although Ault itself remains a small rural community, there has been considerable urban

sprawl in this part of Colorado. Both Fort Collins (about 30 miles to the west of Ault) an

Greeley (about 15 miles to the south of Ault) had large increases in population growth

during in the 1990’s. Both of th

su

c

As in many agricultural communities in the West, the area surrounding Ault has a 

significant Hispanic population. The latest census figures place the Hispanic population 

at 22.3 percent of the total population, with virtually all the rest of the population being 

non-Hispanic whites. The poverty rate for the area is moderate, listed in census data at 

18.1 percent.

Since its construction in 1982, Villa 14 has operated as a Section 8 “elderly” facility. 

Historically, the property has had low vacancy rates, and very low turn-over r

time of the project site visit, the property was 100 percent occupied. 

250 
Evaluation of Mark-to-Market Program Appendix C

sho

e

er, the residential

eighborhood adjacent to Villa 14 looks like any reasonably prosperous middle-class 

rt Collins for retail outlets. There are an elementary 

hool and a middle school in Ault. 

The Housing Market 

The home ownership rate for Ault is moderately high, listed in the 2000 Census at 62.2 

rcent. As might be expected in a small agricultural community, the rental vacancy rate 

is low, the most recent figure being 6.4 percent. 

In the rural area immediately surrounding Ault, the rental opportunities are extremely 

stricted, especially for the small one-bedroom units preferred by most elderly tenants. 

o re

ds

d

vou

infe

The

con

pro

com la 14

and

Ove

man

on ance of the property had been highly satisfactory.

wed only minor indications of aging. This impression was confirmed by a review of

th Physical Condition Assessment (PCA). The third party conducting this review 

recommended only $3,421 worth of improvements for the initial 12-month rehab 

program. 

The Neighborhood 

The Villa 14 complex is immediately adjacent to a well-maintained neighborhood of

single family residences. Like many small agricultural communities, the “main street” 

consists of small restaurants and second-hand shops. Howev

n

neighborhood, with single-family residences. One side of the Villa 14 property faces 

some agricultural property that has not yet been developed. 

Residents must go to Greeley or Fo

sc

pe

re

To obtain units comparable to those at Villa 14, the tenants would have to look at 

pr perties in Greeley or Fort Collins. This is an option most of the elderly residents he

would not like to face, given the urban character of both areas and distance from frien

an family. Tenant interviewee for this study were unanimous in stating that the use of 

chers would force them to accept a living environment they consider significantly 

rior to the one at Villa 14.

Financial History of the Project 

Villa 14 Apartments are owned by a limited partnership that was formed just before

struction of the property began in 1982. The property is managed by a full-service 

perty management firm that manages a wide variety of private-sector residential and

mercial properties. There is an identity of interest between the ownership of Vil

the management company. 

r its history this property was consistently rated in the 90s in terms of financial 

agement. This rating was confirmed by the Physical Condition Assessment which 

c firmed that the mainten

251 
Evaluation of Mark-to-Market Program Appendix C

The

HUD referred the restructuring of Villa 14 to Heskin-Signet, a private Participating 

Admin

the cou

dealing

distress hicle

for dealing with individual properties formerly handled by failed Savings and Loan 

stitutions. In addition to working with distressed properties, Heskin-Signet provides

he senior staff at Heskin-Signet has experience going back to the 1980s dealing with

faci e

per

t the time of the Villa 14 restructuring, Heskin-Signet had completed over 300 

restruct e

time of

in the p

. 

The fol

• The Villa 14 property was originally referred to Heskin-Signet on June 25, 2002. 

• 

the Debt Service Coverage Ratio (DSCR) based on the

property’s past expenses. Using the owner’s past expenses, the owner’s rent study, 

and a $50 unt,

Heskin-Signet concluded that the resulting DCSR would only be 0.71. Under 

rst

n

multifamily rental complexes in Ault. However, both of these properties were 

Participating Administrative Entity (PAE): Heskin-Signet 

istrative Entity (PAE), one that has had a major role in M2M restructurings across

ntry. Heskin-Signet has considerable experience in public/private partnerships

with distressed properties. Heskin-Signet played a major role in handling 

ed properties for the Resolution Trust Corporation (RTC), the government ve

in

consulting services to private-sector real estate developers. 

T

distressed properties. None of the restructuring functions required by OMHAR, such as 

litation of tenant meetings, is “farmed out” by Heskin-Signet. All functions ar

formed by Heskin-Signet staff. 

A

uring agreements for OMHAR. This included over 100 Lite restructurings. At th

 the Villa 14 process, Heskin-Signet had approximately 80 to 90 M2M properties 

rocess of restructuring. Of these, only three were Lites.

Milestones in the M2M Restructuring Process 

lowing are key milestones in the M2M restructuring process: 

• Notification of the owner was made on July 12, 2002. In the original response to 

OMHAR, the owner requested that this restructuring be processed as a “Lite,” thus

accepting any markdowns in the HAP contract rents without any accompanying 

changes in the debt structure of the property. 

After a review of several rent comparability studies in the fall of 2002, Heskin-Signet

indicated that the restructuring could not be processed as a “Lite.” The main reason 

was an insufficiency in

0.00 per-unit benchmark annual deposit for the replacement acco

OMHAR’s underwriting principles this made the property ineligible for “Lite” 

restructuring. The owner was requested to elect processing the property as a Full 

restructuring. The owner approval for the Full restructuring was received in the fi

week of March, 2002. 

As part of the initial Lite restructuring effort, the owner had conducted his ow

rent comparability study. This study noted that there were only two other 

252 
Evaluation of Mark-to-Market Program Appendix C

subsidiz dition, there

were no com

its located in Greeley. This analysis resulted in a conclusion of a

comparable market rent level of $595.00. As indicated above, the use of Greeley 

In particular, the PAE

noted that the owner’s appraiser had used data that were nearly two years old. The 

ts had been falling for nearly two

years. 

• After the own cturing, He et requested th

onditi ssment of the property. 

The Physical Condition Assessment report was submitted to Heskin-Signet on April 

t found No Critical Repair Items and recommended only 

$3,421.00 in repairs during the initial 12-month rehab period. The report predicted a 

in-Signet’s own rent comparability study had come in with an estimate of 

comparable rents, considerably lower than that of the owner’s study. The Heskint figure was $450.00, submitted in March 2003. Looking at its own rent 

appraisal, Heskin-Signet recognized the same comparability problems that had 

ts in Greeley, but adjusted for the current rental market. After this 

analysis, the PAE estimated a market rent figure of $540.00. This figure 

iting model 

that was submitted to OMHAR on May 9, 2003. The formula proposed for the 

ortgage, 

arket upgrade in its plan submission: the installation 

ake the property truly market 

ent in the restructuring has been minimal. The first tenant 

eeting was held on April 28, 2003 with five participants. The participants expressed 

ed. Thus there were no truly comparable units in Ault. In ad

parable units in Eaton, the closest community. The appraiser thus 

used un

as a comparable market could be considered highly suspect.

PAE noted that in this part of Colorado ren

er accepted th

on Asse

e Full restru skin-Sign e required

Physical C

•

23, 2003. This repor

Capital Needs of $568.00 per unit per year for the 20-year estimation period. 

Hesk

Signe

affected the owner’s rent study. The PAE, using its own staff, chose to look at 

comparable uni

represented approximately 77 percent of the pre-restructuring HAP contract rents 

of $648.00. 

• The $540.00 market rent estimate was incorporated into the draft underwr

restructuring was the now normal partial pay-down of the existing first m

with HUD providing additional financing through second and third mortgages. The 

PAE chose to include a major m

of air conditioning. This was considered necessary to m

comparable. The $34,000.00 installation cost was the only amount included in the 12-

month rehab package. 

Tenant Involvement in the M2M Restructuring 

At this site, tenant involvem

m

general satisfaction with the management of the property. However, two tenants did 

express concern about the health and capacity of the current on-site manager. 

The second tenant meeting was held on June 24, 2003, with seven participants. The

tenants expressed general satisfaction with the proposed restructuring agreement. 

253 
Evaluation of Mark-to-Market Program Appendix C

Details Regarding the M2M Restructuring 

Rent Levels

Table 14 provides the rent levels pre- and post-M2M restructuring.

Table 14. Rent Levels Pre- and Post-M2M 

New Contract Rents Previous Contract Rents

Unit Type 

HUDEstablished 

FMRS

PAE Market 

Rents Rent 

Rent as 

Percent 

of FMR Rent 

Rent as 

Percent of 

FMR 

One-Bedroom $581 $540 $540 93% $648 112% 

Estimated Savings

This rent restructuring is estimated to provide HUD a savings of $431,383.00 over 20 

years. This equates to an estimated per-unit savings of $11,972.00 over the same 20-year 

timeframe. 

Financing 

The restructuring called for a pay-down of the initial mortgage of $373,236.54. The M2M 

refinancing included: 

• A new first mortgage was issued for $701,500.00. This was a conventional mortgage 

issued at 6.75 percent with a 30-year term. 

• A HUD-issued second mortgage at $51,886.00, at 3 percent for 30 years. 

• A HUD-issued third mortgage at $195,163.00, at 3 percent for 30 years. 

Renovation Items and Costs 

As noted above, the only item included in the 12-month rehab package was installation of 

the central air conditioning ($34,000). In addition, the replacement plan for the property 

envisaged installation of major capital items only after 10 years. In short, the present 

condition of the property was not a major factor necessitating a financial restructuring. 

Outcomes for Tenants 

The major positive outcome for tenants is the retention of this property for the Section 8 

program over the long term. This property has been maintained in good to excellent 

condition. A high proportion of the retired, elderly tenant population is highly satisfied 

with a high-quality, affordable housing option that is outside the fast-growing Fort 

Collins and Greeley metropolitan areas. If this property had been restructured as a Lite, it 

254 
Evaluation of Mark-to-Market Program Appendix C

is quite possible that the owner may have looked to move the property into the private 

sector after t

Viability of the Project after M2M Restructuring 

Given the owner’s past performance, and the PAE’s care in establishing truly comparable 

market rents, this property should be financially viable. This probability is increased by 

ent vacancy rate at the property, and the tendency for the tenants to

perty for many years. 

term

arginal, at best. This short-term, 

economic decline may have been a significant factor in the owner’s decision to enter 

the M2M program, and to attempt a Lite restructuring. Due to its very good physical 

condition and location, the owner of the Villa 14 property could have seriously 

considered moving the property to the private sector. The choice of a Lite 

restructuring may have been an attempt to “ride out” the short term economic 

downturn and wait to see what conditions would be in 5 years. The PAE’s analysis 

demonstrated that this option would likely have resulted in a decline in services and 

ted

r

r

lue-added” characteristic of the Villa 14 property. For the near term, this 

“draw” should ensure that Villa 14 maintains an effective 0 percent vacancy rate. 

he requisite 5-year programmatic commitment. 

the virtual 0 perc

remain at the pro

Lessons Learned at This Site 

There were two primary lessons learned at this site: 

• An owner’s decision regarding restructuring may be heavily influenced by shortdevelopments in the rental market. In this area of northern Colorado there was a 

significant expansion of the private-sector market in the 1990s. This was primarily in

the Fort Collins and Greeley metropolitan areas. The economic downturn that began

in 2000-2001 had a significant impact on this market. Properties that had been 

profitable in the 1990s now often became m

maintenance at the property. The financial viability of the property may also have 

been endangered. Thus, the timing of the restructuring, and the PAE analysis, resul

in keeping this property in the Section 8 portfolio. 

• The quality of life provided to tenants often needs to be measured by factors othe

than those measured by systems such as REAC. One of the “draws” of Villa 14 for 

tenants is its distance from the suburban sprawl of Fort Collins and Greeley. A high 

proportion of the tenants grew up in this part of Colorado (many returning from othe

parts of the country). The Villa 14 property environment is for many of these tenants

representative of the rural Colorado they have known for most of their lives. This is a

distinct “va

255 
Evaluation of Mark-to-Market Program Appendix C

Case Study Fifteen: Village Green Apartments 

ents is a 57-unit property located in Red Bay, Alabama. The 

as

lthough there is limited economic activity in the immediate region, the local area is not 

ata for 2000 show the poverty rate for this area at

opulation owns homes according to 2000 census 

e entity had been responsible for the oncted during the visit showed indications of water leakage. Some doors 

and windows also showed evidence of damage. The Physical Assessment Report found 

serious rehab needs at the property, which are discussed in the M2M Milestones section 

f this report.

Interviews with PAE staff and on-site management made it clear that this property has 

consistently had a problem attracting and retaining tenants. At the time of the site visit, 

the vacancy rate was 25 percent. The historic turnover rate has been much the same, at 24 

percent. 

Red Bay, Alabama—Full Restructuring 

The Property, Neighborhood, Housing Market, 

and Financial History

The Property

The Village Green Apartm

complex consists of nine residential buildings and an additional office building. The units 

are distributed among four 2-story buildings and six 1-story buildings. The complex w

constructed in 1981 under the Section 8 New Construction program, and has the garden 

apartment style of so many of the Section 8 structures built in the 1970s and 1980s.

Red Bay is a small community of approximately 6,000 located in northern Alabama, 

almost directly on the Mississippi border. The community serves as a service center for

the surrounding agricultural economy. There is virtually no manufacturing industry in

Red Bay, and the retail sector is also restricted 

A

one of severely low incomes. Census d

9.9 percent. Nearly 85 percent of the p

data. There is a limited rental market in the area, with a rental vacancy rate at only 4.5 

percent. The minority population in the area is extremely small, as 97.7 percent of the 

population was classified as non-Hispanic white in the census data. 

The property was developed by a large company from the west coast that also owned 

some 100 other Section 8 properties. This sam

site management of the property. 

At the time of the visit to the site for this study, there were indications of very poor 

maintenance. A considerable portion of the external siding appeared warped. A number 

of the units inspe

o

256 
Evaluation of Mark-to-Market Program Appendix C

The Neighborhood 

The Village Green property is approximately one-half mile from one of the major 

commercial thoroughfares in Red Bay, and is set back from a residential road. Because 

the property is set well back from the residential road, it appears almost self-contained, 

ith few if any structures in view from the units. The closest structures to the Village 

well maintained. In 

ddition, there is another subsidized multifamily property on the same road. The property 

n the main thoroughfare. 

he arket in the immediate area, with nearly 85 percent of the 

al

mar

Ten

sub

the

sub

thes

Fin

As

e

n

mo

Under the original owner, the Village Green property was consistently rated poorly on its 

RE

con

r

The

had

und

und

con

the

und

w

Green property are several single-family residences that appear to be

a

is a relatively short walk (about one-half mile) to retail outlets o

The Housing Market 

T re is a limited rental m

population owning homes according to 2000 census data. The vacancy rate for the rent

ket was only 4.5 percent in that same census data. 

ants indicated that there were virtually no multifamily rental properties, except for 

sidized housing, in the immediate area. Tenants perceived limited opportunities for 

use of vouchers. A number of the tenants indicated that their first option, after 

sidized housing, was isolated rural rental units. Some of the tenants indicated that 

e units were often significantly inferior in quality to subsidized units. 

ancial History of the Project 

noted earlier, at the time this property came into M2M it was owned and managed by 

th same large west coast firm that had built it in 1981. During the initial stages of the 

M2M process, more than 40 of the Section 8 properties owned by this firm were 

tra sferred to the company that owns Village Green now. This entity owns and manages

re than 200 Section 8 properties.

AC financial scores. Immediately prior to the M2M processing, there was particular 

cern regarding the extremely low (approximately $5,000) cash reserves maintained 

fo the property.

The Participating Administrative Entity (PAE): Jefferson County

Assisted Housing Corporation 

Jefferson County Assisted Housing Corporation is one of the few public PAEs that

consistently maintained a large presence in the M2M program. Most of the 

erwriting activities of the PAE are performed on a contractual basis, by individual 

erwriters in the Montgomery, Alabama vicinity. However, the underwriting 

sultants employed by Jefferson County have considerable experience working with

M2M program, and interviews with the underwriters indicated a detailed 

erstanding of the M2M process and of subsidized housing issues in general.

257 
Evaluation of Mark-to-Market Program Appendix C

One

acti

sponsible for conducting all requisite tenant meetings for the M2M restructuring. 

The

This property was referred to OMHAR in December 2002. 

• OMHAR referred the property to the PAE, Jefferson County Housing Corporation, in 

January 2003. 

• The first Physical Condition Assessment (PCA) report was submitted to Jefferson 

County on February 5, 2003. This report provided the first indication that there were 

serious rehab requirements at the property. The first estimate for critical repair 

requirements was slightly over $308,000.00. This was more than $6,000.00 per unit. 

This was within the range of possible M2M commitments, but still a major expense 

item. Once the possible size of the rehab requirements for the property was identified, 

the lead underwriter began to question the advisability of proceeding with the M2M 

restructuring for the property. A key issue was the historic vacancy rate at the 

property. Based on usual criteria for doing such a restructuring, the historic vacancy 

rate at Red Bay would exclude it from consideration. However, the lack of large 

numbers of rental properties in the Red Bay area led the underwriter to continue with 

recommendations for the M2M restructuring plan. 

• In the spring of 2002, the plan development was put on hold when it became known 

that the large portfolio holder was negotiating to transfer the property to another 

ransfer was completed in July when over 40 Section 8 properties 

of the original were transferred to another major holder of Section 8 properties. This 

ged more than 200 Section 8 properties. Plan development 

was put on hold while the PAE waited for the new management entity to assess the 

ents, and be able to respond to specifics of any plan. 

was held on June 22, 2003.

rship changed, the PAE underwriter continued to

obtain background information regarding the suitability of the Village Green property 

art of this process the underwriter requested input from the 

local Housing Agency. The local agency staff noted that the Village Green complex 

ized housing in Red Bay. Since that time the local housing 

agency had been able to open more than 150 multifamily units in Red Bay. Local 

agency staff indicated that the Red Bay complex had a historic reputation for not 

screening tenants well. This had led to the complex having a bad reputation, and for 

many prospective tenants was considered the last option of available subsidized 

housing in Red Bay. This viewpoint was confirmed by interviews conducted during 

senior staff person at Jefferson County coordinates all the M2M restructuring 

vities and assigns properties to specific underwriters. This individual is also

re

Milestones in the M2M Restructuring Process 

following are key milestones in the M2M restructuring process: 

•

owner entity. This t

entity owned and mana

requirem

• The first tenant meeting

• During the period that the owne

for a restructuring. As p

had been the first subsid

258 
Evaluation of Mark-to-Market Program Appendix C

the site visit. Several respondents indicated that the property was noted for fairly 

frequent visits by law enforcement officers to address a variety of problems. 

assessment visits to the 

property in August and September 2002. Based on these assessments, the new 

Based on the property assessment, in October 2003, the PAE began development of a 

draft restructuring that the general

census information showed a definite need to maintain or even expand the amount of 

subsidized housing in the locale. However, they anticipated that OMHAR would have 

serious questions about a property with the traditionally high vacancy rate as at 

The

atte nt were 

exp

Re

No

Estimated Savings 

No plan developed as yet. 

Financing 

No plan developed as yet. 

Renovation Items and Costs 

No plan developed as yet. 

Outcomes for Tenants 

This is a case where it is unclear whether a successful M2M restructuring will be of real 

benefit to the tenants. This property has not been well maintained, and it is not certain 

that the new ownership group can “turn it around.” This is a case where the PAE and the 

local Housing staff should seriously consider alternatives to the restructuring. Tenants 

• Staff from the new owner entity conducted a series of

ownership entity indicated that it had confidence that it could address the problems 

identified at the complex, including a marketing strategy to reduce the historic 

vacancy rate at the property. 

•

plan. The underwriters were still maintaining

Village Green. 

Tenant Involvement in the M2M Restructuring 

initial tenant meeting at Red Bay was held on June 22, 2003. There were five 

ndees at the meeting. At this meeting no concerns about property manageme

ressed.

Details of the M2M Restructuring 

nt Levels

plan developed as yet.

259 
Evaluation of Mark-to-Market Program Appendix C 

260 

expressed skepticism about using vouchers, but a study by Office of Housing staff would 

seem advisable. 

Viability of the Project after M2M Restructuring 

It is unclear if a successful plan can be developed for this property. The key factor is the 

historic vacancy rate. Unless there is radical improvement on that score, it would seem 

that the property cannot be made viable. A short-term option might be to give the new 

management six months to a year to show significant improvement in the vacancy rate. 

Lessons Learned from This Site 

The principal lessons learned at this site include: 

• The importance of subsidized multifamily housing in small and rural communities. In 

the case of Red Bay, all the performance indicators pointed to the lack of suitability 

of this property for a restructuring. In short, based on its condition and historic 

vacancy rate, this property was a poor investment for the government. However, 

those with the best knowledge of the local housing market, including the public PAE, 

felt that they should push this effort as far as possible. Perhaps, this type of 

demographic area should get special consideration in the review process. 

• This was obviously a case where the process would have benefited from a RAAP type 

of analysis early on. If a review of this type had been conducted, it may have been 

possible to reach a decision relatively quickly, possibly saving HUD considerable 

administrative costs. In addition, if such a determination was made in the initial 

stages of the process, it would provide tenants, owners, and local officials a longer 

timeframe to review options for the future of the property and the tenants. 
U.S. Department of Housing and Urban Development

Office of Policy Development and Research

Washington, DC 20410-6000

Official Business

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March 2005