Capture current rent levels with HUD’s Mark-Up-to-Market process

This is the story of how Walker & Dunlop used affordable lending expertise and Section 8 experience to allow our client to capture off-cycle rental increases and add significant value to their workforce housing asset.

There is a common misconception in the affordable housing industry that a Section 8 subsidized property cannot capture current market rent levels through the HUD-approved, Mark-Up-To-Market (“MUTM”) process outside of the traditional five-year renewal cycle. But that is not always the case.

A recent transaction highlights the ability of investors to capture rent increases in a dynamic, fast-growing, inventory-constrained market.

The challenge

Recently, a client approached the Walker & Dunlop HUD/FHA financing team about a potential solution for a 146-unit, 100-percent Section 8 property located in Boston, MA,  where market rents grew 9.8 percent between December 2021 and December 2022.

The client needed capital to complete a series of planned upgrades to the property, including new amenities and interior renovations for each unit. However, Section 8 subsidized rental rates lagged the market rates and the client was outside of the 5-year cycle to capture them.

The solution

By taking the time to understand the client’s needs, Walker & Dunlop was able to leverage our deep affordable lending expertise to introduce the borrower to HUD’s 223(f) financing program, which includes a number of key features that addressed the client’s strategic priorities, including:

• Completion of the Mark Up To Market process outside of the traditional five year cycle 
• Qualification for the interest rate reduction program, which allows the borrower to capture an adjustment should interest rates drop during the term of the loan 
• Streamlined closing with minimal closing costs, little or no paperwork, no third-party reports, no lender fees, and a simple date-down title endorsement

The borrower quickly took the opportunity to close a loan with this structure.

The result

Upon the transaction’s close, our client realized a number of significant benefits, including: 

• ~$14MM in cash proceeds, which was earmarked for significant capital improvements, upgraded amenities, and a dramatically improved resident experience 
• A $445,000 annual increase in gross rents, due to the off-cycle market rate adjustment of $254 per month, per unit. (It should be noted that there is no change to the rent that the tenant pays as the adjustment is absorbed through the Section 8 subsidy.)
• A 20 percent increase in the property’s value

Perhaps most importantly, the community preserved 146 units of workforce housing, which is desperately needed in high growth, expensive markets like Boston where ever-increasing rental rates continually threaten to price out vulnerable residents. 

Interested in learning more?

Walker & Dunlop is extremely experienced with the HUD 223(f) and IRR lending programs, having completed more than 500 transactions since these programs were launched. In addition, our HUD team is experienced with the specialized financing required to refinance Section 8 deals to provide the highest outcome for the client, while maintaining the property’s affordability.

If you are an owner/investor in a Section 8 property and have upcoming finance or refinance needs, please contact us, or reach out to a member of our team: Chris Rumul, Cole Parker, Jason Silva, and Mike Valucci.