Section 515 Preservation Feasibility Study Case Study: Recapitalizing a 100-Unit Rental Assistance Portfolio with 4 Percent Credits in San Joaquin, Fresno County, California

A three-property, 100-unit USDA Section 515 portfolio on West California Avenue in San Joaquin, a farmworker community in western Fresno County, with Section 521 rental assistance on 97 units, recapitalized through a transfer that assumes the $3,266,411 USDA loan, pairs $10,000,000 of tax-exempt bonds with 4 percent federal and California state credits, and funds a $21,623,031 total development cost, $216,230 per unit. Debt service coverage of 1.20x on the combined senior and USDA debt in Year 1 rising to 1.27x in Year 5, a senior loan that fits inside a HUD 223(f) affordable sizing and above a Fannie Mae sizing, and a written determination of feasible, with the finding that the credit rests on the rental assistance contract and the post-rehabilitation budget rents USDA approves, not on the market.

Model study prepared by MMCG Invest | Michal Mohelsky, J.D., FMVA | October 1, 2026

MMCG concludes that the transfer and recapitalization of the three-property, 100-unit Section 515 portfolio on West California Avenue in San Joaquin, California is feasible. The transaction is a preservation, not a development: 97 of 100 units carry Section 521 rental assistance, under which tenants pay 30 percent of income and USDA pays the balance of a budget-based rent, so the Project's revenue is set by the budget USDA approves rather than by the market, and its demand question is answered by a waiting list rather than by a capture rate. On post-rehabilitation basic rents that MMCG models at $1,225 for a one-bedroom, $1,450 for a two-bedroom, $1,650 for a three-bedroom and $1,800 for a four-bedroom, and a stabilized vacancy of 3 percent, the Project produces cash flow after reserves of $845,406 in Year 1 against combined debt service of $702,120 on the $8,939,000 permanent bond loan and the assumed $3,266,411 USDA loan, a coverage of 1.20x rising to 1.27x by Year 5. The senior loan sits inside the $9,137,000 a HUD 223(f) affordable execution would support at 1.11x and above the $7,281,000 a Fannie Mae execution would support at 1.25x, which is why the bond permanent loan, or a 223(f) refinance of it, is the right take-out and an agency execution is not. The determination is conditioned on four items: USDA's approval of the post-rehabilitation budget-based rents and renewal of the rental assistance contract on 97 units, which is the single fact the credit rests on; a capital needs assessment, accepted by the California Tax Credit Allocation Committee under the pilot's new rule, that matches the $7,650,000 rehabilitation scope; USDA's approval of the subordination of the assumed Section 515 loan to the senior bond loan; and confirmation of the 2025 bond closing and the permanent lender's execution, which the committee's staff report does not state.

This is an MMCG model study: a complete feasibility analysis performed on a real Section 515 portfolio using the California Debt Limit Allocation Committee and Tax Credit Allocation Committee's joint staff report of December 11, 2024 and other public data, prepared to show lenders, bond issuers and syndicators how MMCG underwrites a rural rental housing preservation transaction in which rental assistance, not the market, carries the debt. It is not a client engagement, MMCG has no relationship with the sponsor, the developer, the lender or the issuer, and the analysis does not represent an offer, an appraisal or a recommendation. The portfolio's units, unit mix, rental assistance coverage, credit award, bond allocation, assumed USDA loan, permanent loan amount and total development cost are drawn from the staff report and identified as such. The post-rehabilitation basic rents, the operating budget, the uses of funds within the verified total and the senior loan's rate and term are MMCG assumptions, stated as such, and items that could not be verified from a primary source at the study date, including whether the bonds closed in 2025 and the rehabilitation completed on schedule, are listed in the Conditions and Limitations section rather than assumed.

The Project will continue to operate as three USDA Section 515 rural rental housing properties on adjoining sites at 21900, 22150 and 22200 West California Avenue in San Joaquin, Fresno County, California, a farmworker community of fewer than 5,000 residents in the western San Joaquin Valley, 30 miles southwest of Fresno. The physical program comprises 100 units in one- and two-story wood-frame garden buildings originally placed in service in the early 1990s under credit projects CA-90-111, CA-90-112 and CA-93-003: 27 one-bedroom units, 40 two-bedroom units, 25 three-bedroom units and 8 four-bedroom units, with 99 restricted units and one manager's unit, community rooms, laundries, playgrounds and surface parking. The rehabilitation, scheduled in the staff report for March through December 2025 at a budget MMCG allocates at $7,650,000, or $76,500 per unit, replaces roofs, windows, mechanical systems, kitchens and baths, brings accessibility to current standards, adds solar and energy measures to the committee's requirements, and is performed with tenants in place or temporarily relocated within the portfolio under a relocation plan budgeted at $300,000. The owner is SJ3 Investment Group, LP, with Community Preservation Partners as developer and Edward Mackay Enterprises, LLC and The Beneficial Housing Foundation as general partners, the nonprofit's participation supporting the property tax welfare exemption the budget assumes. Management continues under a USDA-approved agent at 6 percent of effective gross income with an on-site staff of three, and the rental assistance contract, tied to the Section 515 loan that the transfer assumes, continues on 97 units. The Project is positioned as the only rehabilitated rental housing in San Joaquin, serving households at or below 60 percent of area median income with tenants paying 30 percent of income and USDA paying the balance of the approved basic rent.

Marketing and Sales Strategy

The Project does not market in the ordinary sense. The 97 rental assistance units lease from the waiting list USDA requires the owner to maintain, with priority to the existing tenants who return after rehabilitation, and the two non-assisted restricted units lease at the 60 percent of area median income rent through the same list. Outreach runs through the Fresno County Economic Opportunities Commission's farmworker programs, the Westside school districts and the clinics serving the community, and the management agent's compliance calendar handles the annual recertifications that both USDA and the committee require. Retention is structural: a rental assistance unit in a rehabilitated building in a community with no other rental stock does not turn over except by the tenant's choice.

Amenities

San Joaquin is a small incorporated city in western Fresno County on State Route 145, south of Kerman and west of Fresno, in the agricultural belt of the San Joaquin Valley. Its population is below the 5,000 threshold at which the Census Bureau publishes QuickFacts, and the city and county demographic figures were not retrieved at the study date. The portfolio's three sites adjoin on West California Avenue at the west edge of the city, and the properties have operated as the community's rental housing for more than thirty years. The site analysis for a preservation transaction is a physical one: the capital needs assessment's findings on the buildings, the site utilities and the accessibility path, which the committee requires and which the September 25, 2026 pilot allows USDA to accept in place of its own, are the site facts that matter, and they are the second condition precedent.

The portfolio is part of the USDA Section 515 direct loan program, which made rural rental housing loans from 1963 until 2011 and has financed no new property since; its appropriation now funds preservation of the stock it holds. USDA's September 22, 2026 announcement describes the Rural Housing Service portfolio as more than 12,000 properties and about 400,000 affordable rental units, 95 percent of them Section 515, and the agency's last precise count, in January 2023, was 13,050 properties and 392,054 Section 515 units; the Housing Assistance Council's March 2026 analysis counts 12,014 properties and 379,894 units and reports that nearly 80 percent of the properties carry Section 521 rental assistance, for which Congress appropriated $1,715,000,000 in fiscal 2026. The portfolio is shrinking by prepayment and obsolescence, and the transfer is the program's preservation tool: a new owner acquires the property, assumes or re-amortizes the Section 515 loan, keeps the rental assistance contract, and funds the rehabilitation with 4 percent credits and tax-exempt bonds.

The pilot announced in the Federal Register on September 25, 2026 eased three parts of that path. A transfer may now use a developer fee up to the maximum in the state's qualified allocation plan rather than USDA's own limit; USDA may accept a capital needs assessment approved by the tax credit agency in place of its own; and in some cases the Agency appraiser's technical review may be omitted. In a lender's deck presented at the National Housing and Rehabilitation Association's 2026 meeting, the transfer process is described as one through which the existing Section 515 debt becomes subordinate to the new senior debt while the rental assistance tied to the Section 515 loan is retained, which is the structure this study models. The handbook distinguishes a market study of project need, which an appraiser prepares, from a market survey of unit demand, which a non-appraiser may prepare; this study carries the second and relies on the lender's appraisal for the first.

The committee's staff report sets the credit rent limits for the Project at the 2024 limits: $495 and $990 for a one-bedroom, $594 and $1,158 for a two-bedroom, $685 and $1,371 for a three-bedroom and $765 and $1,530 for a four-bedroom at 30 and 60 percent of area median income respectively, and it records rental assistance on 97 units. The rental assistance contract is what makes the credit limits a floor rather than a ceiling. Under Section 521, a tenant in an assisted unit pays 30 percent of adjusted income and USDA pays the difference between that payment and the basic rent, which USDA sets annually from the property's approved budget including its debt service and reserve deposits; and under the rental assistance exception in section 42(g)(2)(B) of the Internal Revenue Code, a unit's gross rent does not exceed the credit limit where the tenant's payment does not and the balance is paid by the Rural Housing Service. The Project's revenue is therefore the budget-based basic rent on 97 units, which USDA approves at closing to cover the new senior debt service, and the 60 percent credit rent on the two non-assisted units.

MMCG models post-rehabilitation basic rents of $1,225 for a one-bedroom, $1,450 for a two-bedroom, $1,650 for a three-bedroom and $1,800 for a four-bedroom, for gross potential rent of $1,760,700 on 99 units, as an MMCG assumption to be replaced by the rents in USDA's approved budget; the figures sit near the Fresno County fair market rents and are the level a rehabilitated property with new senior debt requires. The tenant's share is immaterial to coverage: at the renter incomes of a farmworker community the tenant payment averages roughly $500 per month, and the rental assistance pays the rest. The risk in that structure is the contract, not the market, and it is the first condition precedent.

A preservation of a rental assistance property has no demand question in the market study sense. Ninety-seven of 100 units are occupied by households that pay 30 percent of income, in a community with no competing rental stock, and the vacancy on the committee's and USDA's records is frictional. The study carries a stabilized vacancy and collection loss of 3 percent, the convention for a rental assistance property, against the 7 percent HUD applies to market-rate projects, and treats the waiting list as the demand evidence: the management agent's list, maintained under USDA's requirements, should show qualified households in excess of annual turnover, which in a rural assisted property runs under 10 percent. The market survey of unit demand that HB-1-3560 contemplates for a transfer is satisfied by the occupancy history and the list, and the lender's appraisal supplies the market study of need. No competing rental property was identified in San Joaquin at the study date, and the nearest conventional apartments are in Kerman and Fresno.

Location: 21900, 22150 and 22200 West California Avenue, San Joaquin, CA 93660 Units: 100 (99 restricted, 1 manager)

Source: CDLAC and CTCAC staff report CA-24-785 for the total; MMCG allocation of the uses

The total development cost of $216,230 per unit is a preservation figure: acquisition at $82,000 per unit and rehabilitation at $76,500 per unit on buildings whose land and shells already exist, against the $341,000 per unit average of MAA's 2026 ground-up pipeline. The construction-period bond loan of $10,000,000 converts to the $8,939,000 permanent loan at stabilization, with the difference repaid from the credit equity installments; the developer fee of $2,163,000 is 10 percent of total development cost and inside the committee's limit, with the pilot now allowing a transfer to use the state plan's maximum.

Loan Assumptions

The senior loan fits the 223(f) affordable sizing with $198,000 to spare and exceeds the Fannie Mae sizing by $1,658,000. A 223(f) refinance of the bond loan after stabilization, at 1.11x and a 25 basis point premium, is the execution that matches the capital stack; an agency execution at 1.25x would require $1,658,000 of additional equity or a smaller rehabilitation, and the study does not recommend it.

The Year 1 operating budget at 97 percent occupancy is built for a California rural rental assistance property, with the property tax welfare exemption assumed on the strength of the nonprofit general partner.

The controllable line of $6,900 per unit includes insurance, which in the California valley runs above the National Apartment Association's 2024 national average of $777, and the utilities an owner pays on a rental assistance property, and it sits inside the IREM 2024 national all-in figure of $7,981 per unit only because the tax line is nearly absent. The welfare exemption under California's Revenue and Taxation Code section 214 is available to a limited partnership with a qualifying nonprofit managing general partner on a restricted property and is carried as an assumption to be confirmed with the Fresno County Assessor; without it the tax line would be roughly $220,000 and Year 1 coverage would fall to 0.93x, which is why the exemption is a condition in substance if not in form. The replacement reserve of $400 per unit is above the agency minimum and consistent with USDA's reserve requirement on a rehabilitated property.

There is no lease-up year. The property is occupied through the rehabilitation under the relocation plan and returns to 97 percent occupancy on completion, and the pro forma begins at stabilization. Rents escalate 2 percent per year, as USDA's budget-based rents move with the approved budget rather than with the market, and expenses 3 percent, so coverage rises only on the fixed debt service. The combined coverage of 1.20x in Year 1 is above the 1.15x the senior lender requires and the senior-only coverage of 1.25x, with the Section 515 loan subordinate and payable from surplus cash, is the figure a 223(f) refinance would underwrite at its 1.11x test with room to spare.

At Year 1 rents, the property's fixed operating cost is $760,000 including the replacement reserve, and its variable cost is the management fee.

The debt break-even at 88.3 percent sits nine points below the forecast, which on a rental assistance property is a wide cushion: the units do not go vacant for want of demand, and the threshold describes the loss of rental assistance on about nine units, not a market event.

The Project holds coverage above 1.0x in every single-factor case except the denial of the welfare exemption, which is why the exemption is carried as a condition in substance; the loss of rental assistance on ten units costs fifteen points of coverage, which is the measure of the credit's dependence on the Section 521 appropriation, and the combined downside case falls to 0.90x. None of these cases is a market event. They are the contract, the budget and the tax status, and the lender's conditions should be written to them.

The determination of feasible is subject to the following conditions precedent:

The following items could not be verified from a primary source at the study date and are disclosed: whether the bonds closed and the rehabilitation was completed on the staff report's schedule; the permanent lender's execution, rate and term; the properties' year built and the condition findings of the capital needs assessment; USDA's current basic and note rents for the three properties and the rental assistance contract's expiration; the operating history and the waiting list; the welfare exemption status; the state credit pricing; the allocation of uses within the verified $21,623,031 total, which is MMCG's; and the population and household figures for San Joaquin and Fresno County, which were not retrieved.

This model study applies the methodology described on MMCG's multifamily feasibility study, USDA multifamily feasibility study and LIHTC market study pages. MMCG prepares feasibility studies for Section 515 and 538 transactions, 4 percent and 9 percent credit developments, and HUD, agency and bank multifamily lenders nationwide, with engagements from $4,900 and delivery in 9 to 16 business days.