MDA Small Rental Assistance Program: Round Two?

Well I have to say I was clearly disappointed in the way the MS Development Authority handled Rd. 1 of the SRAP (Small Rental Assistance Program). The MDA was a bit overwhelmed in my opinion, however they recognized this and from what I hear from the inside is that they are fully preparing for Rd. 2 and gearing it towards more time efficiency for everyone involved. This Program is without a doubt one of the most lucrative incentives offered by any governing body in the history of the industry. It shows how motivated the State of Mississippi and HUD are to revitalize Katrina-affected areas on the Gulf Coast.

Here is a very good professional form on how the SRAP is going to work. This is based on our clients’ GFEs (Good Faith Estimates) from their lending source, HUD Increased Median Rent, plus our own due diligence on the program.

ONCE APPROVED: MDA/HUD will offer a forgivable loan of $27,500 per 3-bedroom unit. If the builder completes the unit(s) within 180 days of the quarry permit, a completion bond in the amount of $9,000 will be awarded. Let’s take a duplex for example. A duplex has 2 units, right? If you build a duplex and each side has 3 bedrooms, your issued “funds” will total $73,000 if completed within the stated time parameters. $73,000 IN ADVANCE! Technically, you get half the amount minus the bonus by allowing it. However, when MDA issues you the funds, it will place an immediate subordinate lien position in the property. Many investors will make the mistake of doing this. Upon completion and your lender assigns the mortgage to a final loan provider, no lender will take a property with a subordinate lein….SO…you must wait until completion to get the whole thing done.

If your mortgage amount is $220,000, let’s look at the following pro forma:

Principal amount and interest: $1,500

Real Estate Tax: $150

Insurance: $250

Property Management: $150

Total Operating Expenses: $2,050 Monthly

Your NET monthly rent in accordance with the MDA SRAP rent limits and also taking into account the market rent for the area: $1,800 +/-

Remember that you have to keep this property for 5 years.

Debt + Operating Expenses of $2,050 minus your monthly rent of $1,800 equals $250

What is your monthly negative cash flow?

For 5 years or 60 months, your negative cash flow is $250 x 60 = $15,000.

So you’re negative $15,000… Obviously, you’ve got a full $73,000 subsidy up front, so you’re not technically in the red.

At the end of 5 years and your negative cash flow is subsidized by part of the $73,000, your leftover funds after 5 years are $73,000 minus $15,000 equals $58,000.

At the end of the fifth year, the subordinate lien is forgiven and the investor keeps the remaining balance. Of course, if he wants to put more money out of pocket to reduce his principal balance up front, he can do so, ultimately giving him a higher net margin above $58,000.

Take this in addition to Go Zone Accelerated or Bonus Depreciation and you have a great investment. We were told yesterday that approvals were likely this week or next, which has now happened. We look forward to working with the next round of investors who wish to apply for the Mississippi Small Rental Assistance Program.