HUD Handbook 4350.3 § 1-3

A.     Financing Subsidies: Mortgage Insurance and Mortgage Interest Rate
              Subsidies

              1.      Section 221(d)(3) BMIR. This program insured and subsidized mortgage
                      loans to facilitate the new construction or substantial rehabilitation of
                      multifamily rental or cooperative housing for low- and moderate-income
                      families. The reduced mortgage interest rate, usually from 1% to 3%,
                      resulted in lower operating costs for these projects and therefore reduced
                      rents. This program no longer provides subsidies for new mortgage
                      loans, but existing Section 221(d)(3) BMIR properties continue to operate
                      under the program. Families living in Section 221(d)(3) BMIR projects are
                      considered subsidized because the reduced rents for these properties are
                      made possible by subsidized mortgage interest rates.

Some BMIR projects have experienced escalating operating costs that
                      have caused the BMIR rents to increase beyond levels that are readily
                      affordable to lower and moderate-income tenants. In these cases, HUD
                      may have allocated project-based rental assistance through Section 8
                      Loan Management Set-Aside (LMSA) to these properties to decrease
                      vacancies and improve the project’s financial position (see subparagraph
                      C below).

              2.      Section 236. The Section 236 program, established by the Housing and
                      Urban Development Act of 1968, combined federal mortgage insurance
                      with interest reduction payments to the mortgagee for the production of
                      low-cost rental housing. Under this program, HUD provided interest
                      subsidies to lower a project’s mortgage interest rate to as low as 1
                      percent. This program no longer provides insurance or subsidies for new
                      mortgage loans, but existing Section 236 properties continue to operate
                      under the program. The interest reduction payment results in lower
                      operating costs and subsequently a reduced rent structure.

                      The Section 236 basic rent is the rent that the owner must collect to cover
                      the property’s operating costs given the mortgage interest reduction
                      payments made to the property. The Section 236 market rent represents
                      the rents needed to cover operating costs if the mortgage interest were
                      not subsidized. All tenants pay at least the Section 236 basic rent for
                      their property and, depending on their income level, may pay a rent up to
                      the Section 236 market rent. Tenants paying less than the Section 236
                      market rent are considered assisted tenants.

                      Some Section 236 properties have experienced escalating operating
                      costs, causing the basic rents to increase beyond levels readily affordable
                      to many low-income tenants. To help maintain the financial health of the
                      property, HUD may have allocated project-based rental assistance
                      through Section 8 LMSA to a Section 236 property (see subparagraph C
                      below). Some Section 236 properties have other forms of project-based
                      rental assistance, such as Rent Supplement or RAP (see subparagraph C
                      below).

              3.      Section 231. The Section 231 program insures mortgage loans to
                      facilitate the construction and substantial rehabilitation of multifamily
                      rental housing for elderly persons and/or persons with physical
                      disabilities. In Section 231 properties, elderly persons or elderly families
                      must occupy no less than 50 percent of the units. In units designated as
                      elderly units, owners must restrict occupancy to an elderly person or an
                      elderly family. Owners may admit nonelderly physically disabled families
                      to the nonelderly units up to the percentage allowed in the Regulatory
                      Agreement. The property may serve a greater percentage of nonelderly
                      persons with physical disabilities than the percentage allowed in the
                      regulatory agreement only after the owner has received written approval
                      from HUD. This program no longer provides subsidies for new mortgage
                      loans, but existing Section 231 properties with subsidy continue to
                      operate under the program.

Some Section 231 properties have experienced escalating operating
                      costs, causing the rents to increase beyond levels readily affordable to
                      many low-income tenants. To help maintain the financial health of the
                      property, HUD may have allocated project-based rental assistance
                      through Section 8 LMSA to a Section 231 property (see subparagraph C
                      below). Some Section 231 properties have other forms of project-based
                      rental assistance, such as Rent Supplement (see subparagraph C below).

       B.     Direct Loans and Capital Advances

              The Section 202 program has historically developed housing for the elderly and
              persons with disabilities. Project sponsors apply directly to HUD for development
              loans or capital advances. The program began in the 1960s. *Since then*, it has
              evolved from a loan program to a capital advance program and has been
              combined with other forms of assistance to make the rents affordable. Although
              the Section 202 program originally developed housing to serve the elderly and
              persons with disabilities, properties developed through the current Section 202
              Capital Advance program serve only elderly families/persons. The Section 811
              Capital Advance program now serves persons with disabilities. The descriptions
              below summarize the Section 202 program over the years and the addition of the
              Section 811 program.

              1.      Section 202 Direct, Low-Interest Loans. This program provided Section
                      202 low-interest, direct loans to develop housing for the elderly or
                      disabled. Some of these Section 202 properties received tenant
                      subsidies in the form of Rent Supplement or Section 8 Loan Management
                      Set-Aside contracts (see subparagraph C below). The program was
                      discontinued after 1976; however, many of these properties are still in
                      service.

              2.      Section 202 Direct, Formula Interest Rate Loans. This program replaced
                      the Section 202 direct, low-interest loan program. It also provided long-
                      term, direct loans to finance housing for the elderly or persons with
                      disabilities. However, these loans carried an interest rate based on the
                      average yield on 30 year marketable obligations of the United States and
                      properties were developed with 100% Section 8 assistance to help keep
                      units affordable to low-income families. The program, commonly referred
                      to as Section 202/8, stopped making loans in 1991, but there are many
                      Section 202/8 properties in service. The Section 162 program was
                      created in 1988 as a program for persons with disabilities. (See Project
                      Assistance Contracts (PACs) in subparagraph C below).

              3.      Section 202 and Section 811 Capital Advances. Since October 1991,
                      HUD has provided capital advances, rather than loans, to finance the

                      development of rental housing for the elderly and persons with
                      disabilities. The Section 202 Capital Advance Program provides housing
                      for the elderly, and the Section 811 Capital Advance Program does the
                      same for persons with disabilities. These programs replaced the Section
                      202 direct, formula interest rate loan program. In both the Section 202

and Section 811 programs, the development of rental housing with
                      supportive services is subsidized with an interest-free capital advance,
                      and repayment is not required as long as the housing remains available
                      to very low-income elderly or very low-income persons with disabilities.
                      The capital advances are provided together with tenant rental subsidies in
                      the form of Project Rental Assistance Contracts (PRACS) (see
                      subparagraph C below).

       C.     Project Rental Subsidies

              The housing subsidies described below are paid to owners on behalf of tenants
              to keep the amount that tenants pay for rent affordable. This assistance is tied to
              the property and differs in that respect from tenant-based rental assistance
              programs (e.g., Housing Choice Vouchers) where the subsidy follows the tenant
              when a tenant moves to another property.

              1.      Rental Assistance Payment (RAP) Contracts. The RAP program was
                      established by the Housing and Community Development Act of 1974 to
                      provide additional rental assistance subsidy to property owners on behalf
                      of very low-income tenants. RAP was available only to Section 236
                      properties and was the predecessor of the project-based Section 8
                      program.

              2.      Rent Supplement Contracts. The Rent Supplement Program was
                      established by the Housing and Urban Development Act of 1965 and was
                      the first project-based assistance program for mortgages insured by the
                      Office of Housing. These contracts were available to Section 221(d)(3)
                      BMIR, Section 231, Section 236 (insured and noninsured), and Section
                      202 properties for the life of the mortgage. The program was suspended
                      under the housing subsidy moratorium of January 5, 1973. Owners of
                      properties with Rent Supplement contracts were allowed to convert to
                      project-based Section 8 assistance.

              3.      Section 8 Housing Assistance Payments (HAP) Contracts.

                      a.     New Construction and Substantial Rehabilitation Contracts.
                             Under this program, repealed by Congress in 1983, HUD provided
                             (upon application) Section 8 project-based assistance to public
                             housing authorities (PHAs) or private owners for up to 20 or 40
                             years after completion of the construction or substantial
                             rehabilitation of rental housing. The Section 8 financial assistance
                             provided a subsidy that helped bridge the gap between the rents
                             needed to make a project feasible and the rents affordable to the
                             tenants. Financing was provided by commercial lending

                             institutions and often insured by HUD through the Federal
                             Housing Administration (FHA) or a State Housing Finance
                             Agency. HUD has not approved any new projects since 1983, but
                             projects approved prior to that time may still receive subsidy.

b.     Rural Housing Section 515 Properties with Section 8 Contracts
                             (RHS Section 515/8). The USDA Rural Housing Service Section
                             515 Rural Rental Housing program provides direct, below-market
                             interest rate loans for the construction or acquisition and
                             rehabilitation of rental housing for low- and moderate-income
                             families (including the elderly and disabled) in rural areas. Some
                             properties developed through this program received Section 8
                             rental assistance contracts to make the rental units more
                             affordable to eligible families. New Section 515 properties are still
                             being developed, however these new projects are no longer
                             combined with Section 8 contracts.

                      c.     Loan Management Set-Aside (LMSA) Contracts. This Section 8
                             program was developed to provide assistance to insured projects
                             experiencing immediate or potentially serious financial difficulties.
                             The assistance helped minimize defaults and reduce insurance
                             fund claims by providing rental assistance to tenants and thereby
                             making the project affordable to low-income families. The
                             contracts were available for projects insured under the Section
                             236, Section 221(d)(4), and Section 221(d)(3) and 221 (d) (3)
                             BMIR programs, as well as Section 202 projects.

                      d.     Property Disposition Set-Aside (PDSA) Contracts. This Section 8
                             program was used in connection with the sale of HUD-owned
                             properties and/or foreclosure of HUD-held mortgages for
                             properties formerly insured under the Section 236 and Section
                             221(d)(3) BMIR programs or other low-income housing programs.
                             Like LMSA contracts, this program helped ensure that the units in
                             these properties would remain affordable to low-and moderate-
                             income households and minimize displacement.

              4.      Project Assistance Contracts (PACs). Created for Section 202 properties
                      for persons with disabilities, Section 162 provided subsidies in the form of
                      Project Assistance Contracts to nonprofit sponsors to help make rents
                      affordable in Section 202 projects developed for persons with disabilities.
                      The PAC covered the difference between the HUD approved operating
                      costs of the property and the tenant’s contributions toward rent plus the
                      debt service on the loan. HUD awarded PACs to Section 202 projects for
                      persons with disabilities funded in fiscal years 1989 and 1990.

                      Project Rental Assistance Contracts (PRACs). Beginning in 1991, HUD
                      replaced the Section 202/8 and Section 202 PAC programs with
                      assistance through PRACs for projects developed with Section 202 or
                      Section 811 Capital Advances. The PRAC provides a rental subsidy on
                      behalf of tenants in these properties that covers the difference between
                      the HUD approved operating costs of the project and the tenant’s
                      contribution toward the rent.