Tuesday, August 4, 2009

DCD will not increase number of properties eligible for rental rehab program

Cincinnati's Department of Community Development (DCD) won't drop the minimum number of units required to participate in the Rental Rehabilitation Program (RRP), according to a recent memo to city council from city manager Milton Dohoney Jr.

The memo is in response to a June motion introduced by councilmember Roxanne Qualls asking that the number of units be dropped from ten to four, which she said would give the City yet another tool for improving its neighborhoods.

"Cincinnati has numerous small apartment buildings in disrepair that are not eligible for rental rehab assistance," Qualls said in a statement accompanying her motion. "Cincinnati also has numerous four unit buildings that could be good homeownership opportunities for an owner living in one unit using rental income from the other units to support the mortgage."

But Dohoney says that the ten-unit threshold has been very successful, boosting the quality of RRP projects instead of serving as an "incubator" for novice property owners looking to cash in on the rental business.

"The City's desire is to also support smaller owners of multi-family projects; however, the Administration believes that there are other resources within the City and County that are a better fit for those projects than the RRP," he says.

Creating an impact

Started in 1986 and utilizing federal HOME funds administered and overseen by the U.S. Department of Housing and Urban Development, the City's RRP program is subject to numerous rules and regulations.

Because of limited resources and staffing capacity, the City must target the program carefully.

"The Administration has concluded that focusing on providing a developer subsidy for affordable, quality, impactful affordable rental projects garners greater success," he says.

The current minimum of ten units was set by DCD and approved by council in 2007 not only to create this impact, but also to preserve homeownership in some of the City's smaller buildings.

Dohoney says that several neighborhoods also requested this change, fearing that their stock of large, older houses could be carved up into multiple rental units.

"The move could also encourage more absentee or out of town developers to utilize these funds to the detriment of the neighborhoods and increase neighborhood problems," he says. "It is also much easier for owners to abandon a small four-family building than it is a building of ten units or larger."

Capacity and oversight

According to Dohoney, the RRP is geared toward experienced developers with the capacity to provide quality, affordable low-income rental housing.

"Developers must commit a large amount of effort, time, and money to complete a deal," he says. "They incur many financial risks and liabilities that are inherent in the development business – some of which cannot be foreseen."

Dohoney says that past DCD experience has shown that smaller developers are much more likely to fail to complete a project, or to be unwilling or unable to comply with HUD's ongoing HOME monitoring requirements, including things like lead remediation, relocation requirements, proper documentation of low-income households, and minority-owned and small business reporting.

"In either of these scenarios, not only is the City required to repay the funds to HUD (from non-federal sources), but scarce resources have been used on a project that had little likelihood of success," he says.

In regards to Qualls' motion, Dohoney says that an owner-occupied four-family would not be eligible for RRP, since there would only be three rental units.

This arrangement could have additional negative consequences, he says.

"This scenario puts the owner in a difficult situation – where they are now both homeowner and landlord, in addition to the federal and local regulations and ongoing monitoring that overlay the use of HOME funds," Dohoney says. "Should the owner not comply with the HOME regulations, then both the rental property and their home is jeopardized as well."

Other funding available

RRP funding is not a grant or a deferred loan, but a performing loan based upon a review of the project's financials.

At one point, the RRP did offer a deferred loan that did not have to be repaid as long as the building owner remained in compliance.

"This was an unsuccessful model with a high rate of default, especially with the smaller projects in the later years," Dohoney says. "That model of financing is being phased out."

Today, RRP never loans more than 50 percent of hard construction costs.

"This becomes an issue for smaller developers who, many times, cannot obtain bank financing for the other 50 percent," Dohoney says.

Instead of RRP, Dohoney suggests that smaller developers pursue project funding through such sources as the Hamilton County Home Improvement Program, the City of Cincinnati's Notice of Funding Availability, the Home Ownership Center of Greater Cincinnati, and the Cincinnati Development Fund.

Previous reading on BC:
Burnet Place affordable rentals win $1.9M loan package (4/29/09)
Model awarded HOME loan for affordable rehabs (4/2/08)
Model seeks $992,000 loan for 62 units (3/25/08)
Rental rehab changes lead to fewer projects (12/17/07)