WASHINGTON -- Snags in proposed Housing and Urban Development Department rules could make it difficult for private nonprofit organizations to use tax-exempt financing to buy low-income housing units under a new federal program lawmakers and lobbyists say.

Legislation passed by Congress last year encourages the organizations to purchase the units from private developers as a way to keeping the projects from being converted into more expensive properties. Housing industry officials had predicted the organizations would buy the properties using mortgage loans financed with billions of dollars of tax-exempt 501(c)(3) bonds.

But the regulations proposed by HUD in April to implement the program set up roadblocks that could make the mortgages -- and, in turn, the debt financing -- too costly, the lobbyists said. The rules also require a hefty down payment on the properties that many nonprofit organizations could not afford, they said.

Members of Congress have put the department on notice that it needs to clear up those and other problems with the regulations before publishing the final version of the rules sometimes later this year.

"As currently drafted, we do not believe that the regulations reflect congressional intent in a number of very important provisions" in the law, three key housing lawmakers -- Sen. Alan Cranston, D-Calif., Rep. Henry Gonzalez, D-Tex., and Rep. Marge Roukema, R-N.J -- told Housing and Urban Development Secretary Jack Kemp in a letter last month.

Last year's legislation grew out of Congress' concern over the so-called prepayment problem, which involves thousands of housing units built in the 1960s and 1970s by private developers with HUD-subsidized 40-year mortgage loans. In return for the subsidies, the developers were required to keep low-income tenants in the units for 20 years.

Since then, many of the properties increased in value. As the mortgages on those projects have reached their 20th year, developers want to prepay the loans -- thus ending the low-income requirements -- and turn the units into expensive rental or condominium projects.

The law passed last year was designed to solve the prepayment problem by offering financial incentives to developers if they avoid prepayment and instead sell the properties to entities -- mainly 501(c)(3) organizations -- that are interested in preserving the projects for use by low-income people. Housing industry officials have said nonprofits are likely to finance their purchases with mortgages financed by 501(c)(3) bonds and insured by the Federal Housing Administration.

But one of the problems in the HUD regulations would drive up the cost of the mortgages. Though such mortgages are often offered for 40-year terms, in this case HUD is requiring the term of the loans be no longer than 20 years or the remaining term of the original loan on the property.

Confining interest and principal payments over the shorter period of time "raises the effective cost of the debt by 200 basis points," compared with the cost stretched out over 40 years, said Robin Salomon, a housing lobbyist with the law firm of Brownstein, Zeidman and Schomer.

With that restriction, "the question becomes, will the deals be economically feasible?" Mr. Salomon said. "There may not be enough cash to cover debt service."

A second problem is the requirement that buyers offer a 1% "earnest money" deposit when they bid on a property. The requirement is designed to discourage nonprofits who may come forward with an offer but later may be unable to go through with the purchase.

But the effect of the rule may be to "prevent an offer from being made in the first place," said Martin C. Schwartzberg, president of the National Foundation for Affordable Housing Solutions, a nonprofit organization working on preserving low-income housing units.

"To require that tens of thousands of dollars be tied up in an earnest money deposit increases initial out-of-pocket expenses that may make the purchase prohibitively expenseive and impossible for many nonprofits," who are "just the groups that the legislation purports to favor," Mr. Schwartzberg says in a memorandum to members of Congress involved in the issue.

A third problem is the way the regulations give top priority to tenant groups or "resident councils" as purchasers of the units. Once the property goes up for sale, the seller can accept a bid only from those groups for the first 12 months. Bids from nonprofits or other interested purchasers must be held until the end of that period.

In their letter to Secretary Kemp, the three housing legislators say the provision runs counter to their intent in drafting the law. "There is absolutely no legislative basis for distinguishing resident councils" from other purchasers interested in keeping the units for low-income tenants, the lawmakers said.

Forcing a nonprofit to wait up to a year between the time a bid is made and is accepted will discourage those groups from coming forward, the lawmakers warned, saying the requirement "renders the sale program unworkable from the buyer's point of view."

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