Doing the Right Thing

4 min read

How Clinton Arms leveraged Mark-to-Market government financing

Jobco Incorporated recently closed the green $6.2 million Mark-To-Market refinancing of Clinton Arms, a 73-unit apartment complex in Newark, N.J. that occupies an entire square block and is comprised of four residential buildings and one office/resident center. The project was originally developed and built by Jobco in 1985 as project-based Section 8 low-income housing.

We felt it was the right thing to do and the right time to do it for the people who live at Clinton Arms, as well as for the city of Newark. We allocated a great deal of our resources and effort to ensure this green building renovation would be brought to fruition.

Jobco couldn’t be happier with what this will mean to the community in terms of providing low-income housing that’s not only healthier for residents, but also provides them with maximum energy efficiency that will result in savings, both economically and environmentally.

In order to understand the significance of the Clinton Arms refinancing accomplishment, it’s critical to understand that from 1975 to 1985, the U.S. Department of Housing and Urban Development (HUD) financed more than 20,000 apartment buildings under the project-based Section 8 subsidy program.

Under this historic program, property owners were given a federally insured mortgage to underwrite the cost of new construction and development debt, and given rental income (Housing Assistance Payment Contract—HAP) for 20 years through a Section 8 rent subsidy for each tenant in an amount that was sufficient to both operate the property responsibly and repay the mortgage. However, the rental income (HAP) of the property often exceeded that of comparable “market rents” in the local housing markets, due to the financing and operating costs.

In the late 1990s, as these 20-year contracts expired, HUD projected a decrease in future Section 8 appropriations from Congress and sought to diminish the amount of rental income it was feeding these properties in Section 8 subsidy. The Mark-to-Market program was developed to resize mortgages by using a newly established superfund to pay them down, not by any set percentage or fixed amount, but rather by “marking down” the existing over-market rents to comparable market rent levels. Then the hard debt service is reduced to what remained after operating the property at lower market rents, thereby reducing the amount of Section 8 funding needed to operate the property for the next 20 years. To accomplish fair pricing, HUD conducts a market rent study to develop the target rents. A 20-year needs assessment is also part of the process.

Essentially, under the terms of this initiative, as project HAP contracts expire, a new financial underwriting model is developed between the owner, a lender and HUD. At the inception of this process, HUD designates a Public Administering Entity (PAE) to develop the underwriting model and represent HUD’s interests.

In 2008, HUD added the Green Initiative to the Mark-to-Market program. ‘Currently owners have a choice to “go green” and be funded at a higher level in order to have the ability to use green products that minimize environmental toxins in their manufacturing, application and disposal, as well as build a more energy-efficient project.

Under the Green Initiative, the owner is required to install monitoring equipment that measures the future consumption of utilities and compares it to baseline data to measure the savings relating to the green improvements. During the new 20-year compliance period, the owner is required to purchase materials and contract services that minimize toxins both in their manufacturing process and their application. All equipment and services purchased for the property must be energy-efficient and have efficiency ratings that meet strict environmental standards. Additionally, all staff working at the property must be trained in green practices, and the owner is responsible for informing and educating the residents on this environmental initiative.

Given the commitment required from a cost and resources standpoint, many property owners will not consider the Green Initiative. However, for us at Jobco, it was just a natural extension of our commitment to do the right thing for the communities in which we work. Jobco is one of the first property owners to elect to go green, and Clinton Arms is one of the first privately owned HUD projects nationally to successfully refinance and close as a “green” project.

Naturally, we didn’t do it alone. NW Financial, a Jersey City, N.J.-based organization, was the HUD third-party consultant. Under the direction of Lisa Petrosky, director of Affordable Housing at NW, a model was developed and negotiated with Jobco Incorporated through our consultant, David Post of David Post

Through a six-month period of analyzing historic costs, economic trending and a very in-depth, site-specific, 20-year needs assessment, an underwriting model was finalized. The goal of the new underwriting is to reduce the rental income that HUD provides the Clinton Arms project to comparable local market rents, thereby reducing the Section 8 appropriations going forward.

(Robert M. Pascucci, Esq., P.E., is president of Jobco Incorporated in Great Neck, N.Y. Jobco has produced over 10,000 units of new or rehabilitated housing since its beginning in 1950. Under its affiliated property management division, JMI Management, it manages approximately 1,000 units.)

To comment, e-mail Diana Mosher at [email protected].

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