Decoupling USDA RD Loans Preserve Rental Assistance
In the early 1980s, U.S. Department of Agriculture Rural Development (USDA RD) Section 515 mortgages were popular because of their low interest rates and fixed long terms.
These mortgages were tied to the Section 521 rental assistance program that runs concurrently with the term of the Section 515 loan for the full 40-year term. In much of the country, these Section 515 loans are approaching maturity and being paid off in large numbers, which will terminate Section 521 rental assistance, which would wipe out a significant amount of assistance for families in need.
The 2024 Appropriations Bill authorized a pilot program that will enable Rural Development to preserve Section 521 rental assistance at properties past the maturity of their RD loans. This decoupling of the Section 515 loans from the Section 521 rental assistance will allow Rural Development to create standalone Section 521 project-based rental assistance contracts.
According to the law firm Nixon Peabody, which works in affordable housing and housing policy, Section 515 loan maturity impacts more than 1,500 units annually. By 2030 that number will increase significantly to more than 10,000 units annually. The Pilot will facilitate continued rental assistance for up to 1,000 existing units leaving the USDA loan program.
“Any unit that has Section 521 rental assistance will lose that assistance as soon as the Section 515 loan matures or terminates,” says Rebecca Simon, counsel in Nixon Peabody’s Affordable Housing practice group. “Current estimates are 80 percent of the 406,000 Section 515 units are covered by rental assistance.
How Would Decoupling Section 521 Contracts Work?
Rental assistance agreements renewed under the pilot will be extended for at least 10 but not more than 20 years. Owners need to continue to maintain the project as decent, safe, and sanitary housing. Rents will be based on current fair market rents determined by the Department of Housing and Urban Development. In many ways, Section 521 would mirror how Section 8 project based rental assistance contracts work.
The next steps will be for USDA to work with stakeholders to develop the pilot and related regulations, including how to participate in the program.
In the meantime, remember that decoupling requires a capital needs assessment at closing and that some of the rental assistance may be transferred to a HUD PBRA contract, and undertaking that may necessitate the assistance of a HUD compliance professional.
Housing Compliance Auditor, Compliance Consultant
4moThis will be a great way to improve existing housing for years to come, good news!
Director of Compliance Ohio Region at Moderate Income Management Company Inc.
4moIn an ever evolving landscape, this seems to be a solution that needs to happen to secure housing in areas that definitely can't afford to lose any type of affordable housing. Very interested to see how this will progress.