Mark-to-Market: HUD's Section 8 Debt Restructuring Program

Key points

• Eligibility requires an FHA-insured or HUD-held mortgage, a qualifying project-based assistance contract, and assisted rents above comparable market rents.
• The restructured first mortgage is sized to NOI at the lower of restructured Section 8 rents or use-agreement rents.
• Debt that cannot be supported can move into a second mortgage sized to what the participating administrative entity expects to be repaid.
• Restructured properties take a recorded use agreement of at least 30 years with affordability set-asides.
• HUD-held loans are generally ineligible for 223(a)(7), except those subject to a Mark-to-Market restructuring.

Why Mark-to-Market exists

Many older Section 8 properties were financed when contract rents were set to support their mortgages, and in some markets those rents ended up above what comparable unassisted apartments charged. Renewing the contracts at the old rents meant paying above-market subsidy; cutting rents to market without addressing the debt risked defaults on FHA-insured loans. MAHRA's Mark-to-Market program does both: it lowers rents toward market at renewal and restructures the debt so the property stays viable as affordable housing.

Which properties are eligible

Under 24 CFR 401.100, an eligible project must:

• Have a mortgage insured or held by HUD.
• Be covered in whole or part by a qualifying project-based assistance contract, such as Section 8 new construction or substantial rehabilitation, property disposition, moderate rehabilitation, loan management set-aside, or Section 8 renewed under Section 524 of MAHRA.
• Have current gross potential rent for the assisted units above the gross potential rent at comparable market rents.
• Have a first mortgage not previously restructured under the program or HUD's earlier portfolio reengineering demonstration.
• Not be excluded under MAHRA, and otherwise meet the statutory definition or consent to be treated as eligible.

How the restructuring works

A participating administrative entity (PAE), which can be a public agency or a private entity partnered with a public purpose entity, develops a restructuring plan. Under 24 CFR 401.460, the restructured first mortgage is sized to the amount net operating income can support, based on the lower of the restructured Section 8 rents or rents allowed under the use agreement, and the plan cannot increase the existing first mortgage balance or payment. The new first mortgage must be fully amortizing with competitive terms. Debt that the reduced income cannot support can be placed in a second mortgage, limited in part to what the PAE reasonably expects to be repaid from cash flow and residual value.

The plan must also fund adequate replacement reserves and address needed rehabilitation, based on a physical condition assessment the PAE prepares. In certain cases, such as low market vacancy or a project serving mostly elderly or disabled households, the plan must keep the assistance project based rather than converting to vouchers.

The use agreement

Every restructuring plan requires a recorded use agreement in effect for at least 30 years. Among its terms, unless at least 20 percent of units receive project-based assistance, the property must keep either 20 percent of units for households at or below 50 percent of area median income, or 40 percent for households at or below 60 percent of area median income, at rents of no more than 30 percent of the applicable income limit. The use agreement survives a later refinance, so any future HUD or conventional lender will underwrite to it.

Refinancing a Mark-to-Market property later

Owners of restructured properties often return to the market years later. The MAP Guide carves out one specific path: HUD-held loans are generally ineligible for 223(a)(7) streamlined refinancing, but loans subject to a Mark-to-Market restructuring are an exception. A 223(f) refinance is also possible. Either way, the lender must account for the use agreement rents, the treatment of any second mortgage, and HUD approvals tied to the restructuring documents. Owners considering a bridge loan to buy or recapitalize such a property should map those approvals before committing to a timeline.

Where to go next

For streamlined refinancing of restructured properties, see HUD 223(a)(7) loans.

For a full refinance of an assisted property, see HUD 223(f) loans.

Related guides: Refinancing a Section 8 HAP Property with a HUD Loan; Affordable Housing Preservation with HUD Financing.

Related terms: HAP Contract: What It Means in a HUD Refinance; What Is a HUD Section 223(a)(7) Refinance?; Regulatory Agreement: The HUD Contract That Governs Operations; Replacement Reserve: How HUD Sizes and Controls It.

For portfolio figures by state, metro and program, see the HUD multifamily data hub. Bravo Capital’s record: all 26 HUD firm commitments received since April 2022 have closed, totaling $526.0 million (HUD Closing Scorecard).