In the view of the Housing and Urban Development Department, letting a group pay off a 3 percent HUD loan 34 years ahead of time just made good business sense.
But in the view of some critics, the government was signaling a move to get out of costly long-term projects that provide subsidized housing to the elderly and handicapped.
"I think this is a clear demonstration of a major shift in HUD's policy," said Christopher N. Visher, an attorney with the National Housing Law Project.
Focus of the controversy is a 150-unit apartment building for the elderly in Pasadena, Calif., known as Concord Pasadena. Earlier this year the nonprofit owner, the Concord Senior Housing Foundation Inc., offered to pay off its low-interest federal mortgage ahead of time. With interest rates as high as they are, the transaction seemed like a deal for the federal government.
The problem is that the loan was made under HUD's Section 202 program, which helps nonprofit organizations provide housing for the elderly and handicapped.
In general, as long as a sponsor owes money to the federal government, it has to abide by Section 202 regulations. Once the loan is paid off, it generally does not have to comply, and thus the owners can raise rents, kick out tenants, convert units to condominiums or sell the building.
HUD officials say they worked out an agreement with Concord Pasadena owners to protect current tenants from eviction or substantial rent increases. In turn, the agency agreed to provide elderly tenants with rental assistance, under HUD's Section 8 program, to allow the owner a moderate raise in rents.
But although the check for $1.7 million exchanged hands in March, the tenant protection agreement was never signed because of "an administrative error with HUD," according to Philip Abrams, general deputy assistant secretary for housing.
Abrams said in a telephone interview that HUD is still trying to work out an agreement with the owners. "I'm waiting for them to answer us," he said.
Abrams said details for protecting the tenants were discussed before HUD accepted the check, and he considers those discussions "legally binding." If the owners try to back out of the agreement, HUD would "declare a mutual error and reinstate the mortgage," he said.
To do that, HUD probably would have to assume the $2.4 million loan the owners took to pay HUD the $1.7 million it was still owed and to finance some repairs.
The Concord Senior Housing Foundation and its Washington representative did not return phone calls. But a letter from its attorney to Rep. Edward R. Roybal (D-Calif.), who recently held hearings on the issue, said the group is discussing tenant protection and Section 8 rental assistance with HUD.
The attorney added, "Our client advises the motivation for seeking a prepayment was to obtain the freedom of application of the free enterprise system" to raise more money for the operation to pay for proper upkeep.
The property already has been placed on the market with an asking price of $6.8 million, according to Abrams and Visher. Abrams said the new owners would be expected to protect the current tenants, but Visher said the situation is unclear.
Abrams said that allowing prepayment of a Section 202 loan was "unusual," and that he did not expect many similar requests because of HUD requirements for tenant protection. In an internal memo earlier this year, however, Abrams said the Concord Pasadena request was "the first of what we expect to be a series of requests to 'opt out' of subsidy contracts."
In another memo, Michael G. Karem, deputy assistant secretary for multifamily housing programs, said that even before the Concord Pasadena deal his office "received numerous requests" from owners of Section 202 developments to pay back their loans early. He noted that allowing such actions "would produce an immediate cash infusion to the Treasury," and would enable owners "to raise the needed funds" to repair the buildings.
But Karem said HUD "may be subject to severe criticism from Congress, lobbyists for the 202 program and the public in general" if it permits prepayments. Karem said "it would seem inconsistent" for the federal government to continue financial support for construction of new elderly and handicapped housing, if HUD policies allow prepayments "which will invariably lead to a change in the project's use."
Visher of the National Housing Law Project said he has two major concerns. One is the protection of the current tenants, which Abrams said he also supports. The second is that the housing complex continue to provide reasonably priced housing for the elderly for the next 34 years or the complete life of the HUD mortagage. Abrams does not believe the agency should be concerned with this.
Visher also said he believes that prepayment could end up costing HUD more. He said that if HUD decides to finance new housing to replace Concord Pasadena, it will cost much more than the complex did when it was built 16 years ago. In addition, if HUD releases the Section 8 rental assistance to the tenants, it could cost the agency about $1.5 million over the next five years.
While this particular case did not unfold as HUD had planned, Abrams said he believes prepayment should still be allowed on a case-by-case basis, if tenants can be protected.
Visher replied, "This clearly demonstrates a desire by HUD to get out from under the 3 percent loans. They look at this as if they're private bankers."