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Supportive Housing Development
An
Introduction to Operating
Financing
"Operating sources" is defined as those sources
that may be used to pay for the costs of operating and/or
maintaining the housing or physical component of supportive
housing. Operating costs in a project owned by a housing
sponsor include all costs of maintaining the project once it
is ready for occupancy, such as property management,
utilities, maintenance, insurance, security, debt service or
other loan payments, and operating and replacement
reserves. In projects leased by the sponsor (either
single site or scattered site), operating costs generally
include the cost of leasing the units and any maintenance that
is not covered by the owner/landlord.
In market-rate housing, the rents collected from tenants
generally are sufficient to cover not only all operating
costs, but also provide a revenue stream that the
owner/developer takes as profit. In affordable housing,
and particularly supportive housing, the rents collected from
tenants are generally not sufficient to cover operating costs
because the rent charged to tenants are kept at below-market
rates in order to be affordable to households with low-,
very-low or extremely-low incomes. In high cost areas,
even when a building is owned free and clear (without debt),
tenant rents are not sufficient to cover operating
costs. In order to make a project "pencil out" (have
income equal expenses) a project sponsor needs to receive an
ongoing source of funding to supplement tenant rents.
Such funding streams are known as operating subsidies, rent
subsidies, or rental assistance.
Operating subsidies supplement the difference between what
the tenant can afford to pay and the rent the sponsor could
charge under market-rate conditions. To determine the
level of subsidy to be provided, operating or rental subsidy
programs specify the percentage of a tenant's income that can
be used to pay rent, sometimes called the tenant portion, and
determine what the market would bear for a particular size of
rental unit in a particular locality, sometimes called the
fair market rent.
Operating subsidies generally take three forms:
- project-based;
- tenant-based; and,
- sponsor-based.
Project-based subsidies are those that are
"attached" to particular housing units. The project
sponsor receives an amount of funds for each subsidized unit
that is equal to the difference between the tenant portion and
the fair market rent. Project-based subsidies are
generally not moveable -- when a tenant moves the subsidy
remains with the unit. Project-based subsidies generally
tend to be used for single site projects, with the subsidy
attaching to some or all of the units in a building.
Tenant-based subsidies attach to an
individual or family. With this type of subsidy, the
tenant receives the entitlement to a housing subsidy
(sometimes called a voucher) that allows him or her to rent a
unit in the private market from either for-profit or
non-profit owners. Like in the project-based type of subsidy,
the tenant is responsible for the tenant portion and the owner
of the property is subsidized for the difference between the
tenant portion and the fair market rent. Unlike most
project-based subsidies, however, tenant-based subsidies
remain with the tenant when and if he or she chooses to
move. When a tenant leaves a unit, the rental subsidy is
provided to the landlord of the unit he or she subsequently
leases. Tenant-based vouchers are most often used in
programs in which housing is secured though scattered site
leasing.
A third type of operating subsidy is
Sponsor-based. In these types of
projects, the subsidy attaches to a specific housing sponsor,
typically a non-profit housing developer or supportive housing
provider. The sponsor may use the subsidy to subsidize
any unit that the sponsor controls, either through ownership
or leasing. As with the other forms of subsidy, the
sponsor receives an amount of funds for each subsidized unit
that is equal to the difference between the tenant portion and
the fair market rent. When the tenant in a
sponsor-based unit moves, he or she does not retain the
subsidy -- it remains with the sponsor.
Sponsor-based subsidies are moveable in the sense that the
sponsor may choose to move the subsidy from one unit to
another.
The most well-known and widely available source of
operating subsidy is HUD's Housing Choice Voucher Program,
commonly known as the Section 8 Program. Under this Program,
tenants pay 30% of their adjusted income for rent and
utilities, while HUD pays the difference between the tenant's
portion and a HUD-determined Fair Market Rent (FMR), which is
based on actual market rents for the metropolitan area in
which the project is located. The Section 8 Program
provides both project-based and tenant-based subsidies,
described in greater detail in the Section 8 section.
(Most other operating subsidy programs are based on
adaptations of the Section 8 Program model.)
HUD has also established other operating subsidy programs
modeled on the Section 8 program, including the Section 8
Moderate Rehabilitation SRO Program and the Shelter Plus Care
Program (the only program that offers sponsor-based
subsidies). Some capital sources can also be used
for operating subsidies, including the SHP Program, Section
202 and Section 811. In addition, some state government
funders have created operating subsidy programs, such as
California's Supportive Housing Initiative Act ("SHIA")
Program. The Arizona's State Housing Fund and the State
of Nevada's Low Income Housing Trust Fund can in some cases be
used for operating subsidies. Lastly, in some limited
cases, private funders and foundations have established rent
subsidy programs.
How Operating Sources Flow
Section 8 operating subsidies typically flow from HUD to
Local Housing Agencies (LHAs), also known as Housing
Authorities, and from there to individual tenants, projects or
sponsors. The way the funds are allocated by the
LHA differs significantly depending on the types of subsidy
(tenant-, project- or sponsor-based) and the funding
program.
Tenant-based subsidies flow from the
Housing Authority to an individual tenant. While the LHA
actually pays the subsidy to the landlord directly, the
voucher, which represents the LHAs' commitment to provide a
subsidy, belongs to the tenant.
In the Section 8 Program and most programs modeled after
Section 8, individuals who wish to receive a tenant-based
subsidy must place their name on a waiting list and wait for
an extended period of time before receiving a voucher.
Because the eligibility criteria for Section 8 are relatively
broad (any family with children, senior or disabled person
earning at or below 50% of median income is eligible) and
funding for new vouchers very limited, waiting lists tend to
be very long -- it is not uncommon for applicants to wait five
years or more for assistance -- and are often closed for
extended periods of time. HUD imposes very strict rules
on LHAs about managing the waiting list. It must be
maintained in a strict order. When a voucher is
available it must go the person at the top of the list, if
they are eligible. Housing authorities have the ability
to establish waiting list "preferences" for particular groups,
giving them priority on the list. Some housing
authorities have established such preferences for homeless
persons. Preferences for specific types of disabilities,
however, are prohibited. It should be noted that there
is one significant tenant-based operating source, the Shelter
Plus Care Program (S+C) that does not require that tenants be
selected from the Housing Authority's regular waiting list and
allows Housing Authorities much greater flexibility in
allocating vouchers than in the Section 8 Program.
Project-based subsidies flow from LHAs to
the owner/sponsor of individual projects. In Section 8
programs, project sponsors/owners apply for rental subsidies
directly from the Housing Authority. Each Housing
Authority establishes its own process and criteria for
awarding project-based vouchers to eligible projects, within
specific federal regulations and guidelines. The LHA
executes a contract with the sponsor/owner to provide
subsidies for a given period of time, for as long as 10 years,
subject to the availability of funding. It should be
noted that with Section 8 project subsidies, while the subsidy
attaches to particular units, the tenants who occupy those
units must come from the LHA waiting list. This imposes
some significant restrictions on the sponsor, as it limits the
pool of potential tenants and requires tenants be taken in the
order they appear on the LHA list. However, there
are ways that sponsors and LHAs can work together to create a
preference system to help the sponsor obtain tenants who need
the supportive services the provider is offering.
The S+C program is a significant exception --it does not
require that tenants be on the Section 8 waiting list.
The only funding program currently offering
sponsor-based subsides is the S+C
program. Under this program, LHAs apply to HUD in
partnership with non-profit sponsor/owners who request funding
for specific numbers of units. The sponsor
receives an initial contract from the LHA for a five-year
term. As with the other forms of S+C subsidy, tenants
for the units receiving tenant-based subsidies do not have to
come from the Section 8 list, so sponsors have a great deal of
flexibility in tenant selection.
Generally speaking, only Housing Authorities are eligible
to apply to HUD for most types of housing subsidies.
However, as described above, non-profit sponsors/owners are
eligible sub-grantees for project-based and sponsor-based
subsidies. While supportive housing providers generally
cannot be sub-recipients of tenant-based subsidies, there are
ways they can access tenant-based subsidies on behalf of their
clients. These opportunities generally come from Section
8 set aside programs such as the Mainstream Program Vouchers
for People with Disabilities. Under these programs, HUD
awards LHAs special allocations of Section 8 tenant-based
vouchers for special needs populations through a competitive
application process. These programs are highly
competitive and strongly encourage the housing authority to
partner with non-profit social service providers to deliver
services to the households receiving the vouchers.
Supportive housing sponsors who are interested in developing
tenant-based leasing programs can approach their local housing
authority about applying in partnership for the funding, and
non-profits serving people with disabilities and who meet
specified capacity criteria are eligible to apply directly for
Mainstream Program Vouchers.
In addition to the Mainstream Program, HUD has over the
past several years offered vouchers under a number of
different programs targeting different special needs
populations: the Family Unification Program (FUP) for families
reuniting with children in foster care and for youths aging
out of foster care; the Welfare to Work (WtW) Voucher program
for homeless and at-risk families receiving TANF benefits; the
Certain Developments program for persons with disabilities,
and the HUD-VASH program for homeless and at-risk
veterans. Depending on the availability of funding
for the Section 8 Program, however, HUD may elect to issue new
vouchers under these or other programs in the future.
Supportive housing sponsors who are interested in developing
tenant-based leasing programs should monitor the HUD webpage
below to stay abreast of these funding opportunities:
http://www.hud.gov/offices/adm/grants/fundsavail.cfm#grants
Three other significant sources of HUD operating subsidies,
Shelter Plus Care, Section 8 Moderate Rehabilitation SRO and
the Supportive Housing Program are available through the
Continuum of Care process. Section 202 and 811 operating
subsidies are accessed through a competitive application
process. California also administers competitive grant
programs that can provide operating subsidies, including the
SHIA AB2034 programs, and the Emergency Housing and Assistance
Program (EHAP); both of these programs are described in the State Financing
Sources section of this guide.
Go to Main Page of CSH Financing Supportive
Housing Guide
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