WASHINGTON -- The first taxexempt bond deals under HUD's low-income housing preservation program are likely to come to market this fall, housing industry participants said last week.

Paving the way for the first such issue was a $6.3 million taxable bond issue that closed last month, involving a private real estate developer in Mississippi. The underwriter and bond counsel for the issue say it is likely to be used as a model for taxexempt deals in which 501(c)(3) organizations will acquire housing properties under the program.

"We wanted this to be a prototype" that the Department of Housing and Urban Development would feel comfortable with and that could be used again in the nonprofit area, said Stephen J. Wallace, a lawyer with Peabody & Brown, which represents the Mississippi developer.

One underwriter, Coughlin and Co., is working on about a dozen deals involving nonprofit organizations seeking to acquire properties. The first of the deals may come to market by October, said Rick Price, vice president of the firm, which underwrote the taxable Mississippi deal.

The upcoming bond issues are the result of a law that Congress passed in 1990, when it became concerned about the so-called prepayment problem involving thousands of housing units built in the 1960s and 1970s by private developers that received HUD-subsidized 40-year mortgage loans. In return for the subsidies, the developers were required to keep low-income tenants in the units for at least 20 years.

Many of those mortgages have reached their 20th year, prompting many developers to prepay their loans so that they could be released from low-income requirements and turn the units into more expensive rental or condominium properties.

The 1990 legislation, designed to preserve the properties for low-income tenants, discourages prepayments by offering owners two other options.

Under the first option, an owner can elect to keep the units low-income for their remaining useful life, defined by HUD as 50 years. In return, HUD agrees to provide the owner with enough federal subsidies so that he will receive an annual return equal to 8% of the amount of equity he has in the property. The owner is permitted to use the subsidies to finance a so-called equity take-out loan that would be used primarily to rehabilitate the property.

The owners' other option is to sell their properties to entities -- mainly 501(c)(3) organizations -- that are willing to preserve the units for low-income tenants. When the law was passed in 1990, housing industry participants predicted that most nonprofits seeking to acquire properties under the program would finance their purchases using acquisition loans financed with tax-exempt bonds. They estimated that billions of dollars in 501(c)(3) bonds could ultimately be issued.

But no deals have come to market yet, mainly because of bureaucratic delays. HUD spent nearly two years drafting regulations for the program, publishing them in May 1992.

Since then, owners and nonprofit groups have presented proposals to HUD and worked with the department to complete the first deals under the program. Because the law gives first right of refusal to the owners, deals involving owners that want to keep their properties have come through the pipeline first, and are just being finalized now.

One such deal is the $6.3 million issue closed June 27 by the Molpus Co., based in Philadelphia, Miss. The bonds, rated A by Standard and Poor's Corp., are being issued to finance an equity take-out loan that will help Molpus finance rehabilitation of its seven apartment buildings, five of which are in Mississippi and two in Alabama.

Molpus will receive enough subsidies under HUD's Section 8 rental assistance program to ensure payment of debt service on the bonds and an 8% return on the equity in the property.

To obtain its financing, Molpus could have chosen not to issue bonds and instead could have sought a federally insured loan under HUD's Section 241 program. But bond financing was more attractive for several reasons, Coughlin's Price said.

For one, the turnaround time on a Section 241 loan would have been much longer than with the bond-financed, uninsured loan Molpus received, Price said.

Second, the size of a Section 241 loan is limited to 70% of the equity in the project, while there was no such limit on the bond-financed loan, Price said.

Although the Molpus deal involves an owner that decided to stay in the program, the structure of the taxable bond issue will be easily translatable to tax-exempt deals involving nonprofits acquiring properties from owners that want to unload their units, Price said.

"We're lining up issuers now and we've got a lot of interest from local housing authorities as well as state agencies," Price said.

Neither Price nor Wallace of Peabody and Brown could say how many bonds might ultimately be sold by 501(c)(3) organizations acquiring properties under the program, but Price estimated that there are 2,400 properties whose owners are eligible to prepay. He predicted that about 70% of the owners would elect to stay in the program and the other 30% would sell to nonprofits.

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