Through the Section 202 Preservation Program, tax-exempt bond financing is used to refinance (at lower interest rates) the original U.S. Department of Housing and Urban Development (HUD) mortgages issued for development of housing projects for seniors through HUD’s Section 202 program. In 2000, Congress passed a law authorizing HUD to allow pre-payment of Section 202 fixed-rate mortgages and to establish a limited partnership structure between non-profit organizations and equity investors. This allowed non-profits to raise equity through 4-percent Low Income Housing Tax Credits (LIHTC) and tax-exempt financing to inject capital into 202 buildings, upgrade their conditions, and provide development fees to support non-profit owners. The program also reduces the long-term amount owed by offering the capital to pay off high interest rate HUD mortgages, freeing up revenue for non-profit sponsors to offer additional services for their senior tenants, in addition to making capital improvements. In order to be eligible, residents must have an annual income not exceeding 60 percent of Area Median Income (AMI).
The first component of the Section 202 program provides capital advance funds to non-profits for the construction, rehabilitation, or acquisition of supportive housing for seniors. The second program component provides rental assistance in the form of Project Rental Assistance Contracts (PRACs) to subsidize the operating expenses of these developments. Residents pay rent equal to 30 percent of their adjusted income, and the PRAC makes up the difference between rental income and operating expenses.