National Housing Law Project Housing Law Bulletin

New Guidance Re FY 2000 Project-Based Section 8 Contract Renewals

Our last Bulletin contained a review of the major housing policy provisions of Congress’ HUD Appropriations Act for FY 2000, including new laws governing Section 8 contract renewals and tenant protection vouchers where owners remove developments from the HUD program(1). HUD has quickly moved to implement many of those provisions through Notice H 99-36 issued on December 29, 1999 (2). HUD provided further detail through a satellite training staged on January 6, 2000.

The FY 2000 appropriations bill contained important provisions governing HUD’s multifamily housing programs, especially HUD’s authority to renew expiring project-based Section 8 contracts(3). Although the new law does not revise Congress’ 1997 policy decision to leave the renewal decision primarily in the hands of the owner, it does contain provisions to encourage owners to stay in the affordable housing program. The law essentially codifies into statute HUD’s June 1999 ("Mark Up") policy to offer higher market rents to owners of some Section 8 properties with contract rents below market levels, and provides the necessary funding.(4)

With respect to other Section 8 properties with expiring contracts (those ineligible for or declining "Mark Up" or restructuring under "Mark to Market"), the new law also allows owners to obtain renewal contracts, but at various rent levels. The rents HUD must make available on owner request are determined by the project’s current rent level and its relation to comparable market rents, unless the owner or the project is subject to disqualification for program violations.(5)

Under the new law, most owners of properties with current rents above market levels may generally obtain renewals at rents "equal to comparable market rents"(6). An important exception is those owners that are exempt or ineligible for restructuring who can obtain a renewal contract at rents that are higher than market rents at the lesser of existing rents as adjusted by the operating cost adjustment factor (OCAF) or budget-based rents(7). Another important exception to the "market rent" rule is that owners of some other properties, usually those below-market properties that are not eligible for the mandatory mark up (e.g., below-market properties ineligible for the mandatory policy because they have rents below 110 percent of the area Fair Market Rent, or FMR), may receive a negotiated renewal rent up to comparable market levels, but no less than the existing rent as adjusted by HUD’s OCAF (8). Since these latter offers are discretionary with HUD, HUD effectively determines which of these properties will get renewed where owners are unwilling to renew at current rents, although HUD must consider factors relevant to preservation in offering higher rents.(9)

The FY 2000 law establishes a new rule concerning renewals of expiring Section 8 contracts for projects subject to Plans of Action under prior preservation programs which could have Section 8 rents either above or below-market. While those with below-market rents are usually under an obligation to renew any expiring contract at existing rents as adjusted by a cost factor, other properties with above-market rents must now receive a "comparable benefits" offer from HUD.(10)

The new law also specifies how rents will be adjusted in future years after the initial renewal. Most projects renewed under these other authorities, like the mark-up projects, will receive annual rent adjustments pursuant to HUD’s operating cost adjustment formula (OCAF) or, if the owner requests, on a budget basis for actual approved cost increases(11). These adjustments will be important if HUD and owners execute longer-term contracts subject to appropriations.(12)

The new law also revised (again) the notice requirements governing Section 8 contract expirations.(13)

Finally, where Section 8 contracts do terminate by HUD or owner action, including expirations without renewal, the new law makes a major change in extending HUD’s obligation to offer so-called "enhanced voucher" assistance, subject to appropriations, to any previously assisted tenants(14). This new authority governs enhanced vouchers not just for Section 8 terminations, but also for prepayments, and for certain other transactions.

These enhanced vouchers permit payment standards for tenants who choose to remain in a converted property to be set at the actual post-conversion rents for the units, even if higher than the ordinary local payment standard, subject only to the PHA’s "rent reasonableness" determination. This new authority also clarifies that the enhanced voucher subsidy must cover subsequent rent increases as well, subject only to the PHA’s "rent reasonableness" test.(15)

HUD’s new Notice addresses many of the issues left unclear in the appropriations law, and a few others as well. Among them are issues concerning Section 8 renewal policies and procedures, Section 8 termination notices, and enhanced voucher policies. However, it is important to note that most policies and procedures remain the same from FY ‘99, as the basic renewal options for owners have not changed, although they are restated in the Notice. HUD intends this new Notice to provide a single comprehensive guide for owners, managers, tenants and HUD field staff.

Most of the news here relates to requirements related to new policies implementing HUD’s twin authorities to increase rent subsidies in expiring Section 8 developments that currently carry below-market rents. These two authorities are: (1) HUD’s mandatory duty to make market rent offers to owners of certain below-market developments ("Mark Up" policy), and (2) HUD’s discretionary authority to permit a mark-up of below-market rents to a new budget-based rent level (including debt service for rehabilitation financing) that does not exceed market rents for developments owned by nonprofit owners, which are ineligible for the normal mark-up policy ("Mark Up to Budget").

Two important new policies affect nonprofit owners, and apparently both of these are legally authorized under the second discretionary authority. First, nonprofits (including nonprofit controlled limited partnerships established for Tax Credit financing) acquiring properties with expiring below-market rents from for-profit or limited-profit owners can use the Mark Up policy to get higher rents on renewal as part of the sale transaction(16). They are unaffected by the law’s nonprofit ineligibility provision, which would apply if they had been owner of the property all along. Nonprofits must, however, execute an additional 20-year use agreement with affordability restrictions, including acceptance of an annual Section 8 contract if offered. These properties need not meet the other standard eligibility criteria for Mark-Ups.

In addition, for those nonprofits that are ineligible for ordinary Mark-Ups because they are longer-term owners of below-market properties, HUD will exercise its discretion to permit these owners to "mark up" to new budget-based rent levels that include debt service for capital repairs, so long as the resulting rent level does not exceed market(17). These properties must submit a capital needs assessment and rehabilitation financing plan, demonstrating at least a 10 percent contribution toward the repairs from other sources, as well as an estimated monthly reserve deposit for 10 years(18). Properties with some units not assisted under Section 8 will apparently have the burden of the rent increase carried by the Section 8 assisted units(19). The nonprofit owner must also agree to accept Section 8 renewals if offered for an additional 20 years.(20)

HUD’s Notice also restates the ability of projects that do not qualify for the normal mark-up offer (e.g., due to comparable rent levels, physical conditions, or existing use restrictions) to obtain a waiver of the Notice requirements upon Field Office recommendation to Headquarters.(21)

Owners of properties with above-market rents that seek a renewal must generally certify that rents are above market, and the HUD field office will then refer the property to the Office of Multifamily Housing Assistance Restructuring for processing of the renewal at market rents, determined by a later comparability study, with or without a formal debt restructuring plan.

For all properties renewing expiring contracts, the HUD Notice also clarifies that there will be different renewal rules and procedures for projects renewed for the first time after an initial expiration, from those for projects renewed subsequently. These rules and policies primarily concern rent comparability studies required to support owner renewal requests, and rent adjustments subsequent to initial renewal. Continuing recently established policies, owners renewing under the "Mark Up" policy must accept a 5-year renewal contract (subject to annual federal appropriations), and other renewing owners have the option to do so. Apparently, owners may choose contract terms of between one and five years, and HUD will also consider terms longer than five years, as the statute imposes no absolute limit(22). For all renewals, however, regardless of any contract term longer than one year, appropriations are only committed for one year at a time and subject to annual renewal in the subsequent year’s appropriations process. Short-term contracts of less than a year are also possible to protect tenants, to align multiple contracts at a property, or to permit adequate time for processing a mark-up.

Rent comparability studies submitted by owners will have a 5-year lifespan(23). After submission as part of the initial renewal process, a study need not be redone or renewed annually. Where the owner elects a 5-year renewal contract, or where HUD requires one (for Mark-Up properties), rents will generally be adjusted at least by HUD’s operating cost factor during the remaining years on the contract. For those contracts where owners choose the longer term, HUD may provide higher rent adjustments upon owner request if a higher rent is justified by a revised budget. Owners that submitted rent comparability studies last year can use them to support longer renewal contracts now, so long as a 5-year maximum lifespan of the study is not exceeded. Where owners elect only a 1-year contract, they may apply for "Mark Up" at any subsequent expiration, or may request a renewal with a cost adjustment (or possibly a limited budget-based increase).

Where owners have been suspended or debarred, renewal of a contract (but not mark-up) will still be possible if the owner’s bad conduct did not involve the units covered by the contract(24). Otherwise, if the violations concern the property with an expiring contract, the owner must transfer the property in order for the contract to be renewed(25). However, bad conduct with respect to other properties will still disqualify the owner from a renewal under the mark-up policy.(26)

The Notice also contains HUD’s policy about the impact of Real Estate Assessment Center inspection results for contract renewals(27). Depending upon the score received and the existence of any conditions warranting emergency action, the HUD field staff (Program Center Director or Hub Supervisor) must decide whether to renew the contract under the guidance provided. The Notice states a general policy of nonrenewal if serious physical problems at the property affect the health and safety of the residents and the owner is not in compliance with a viable remedial plan.

Many expiring Section 8 contracts affect properties that were processed under either the Preservation program or the earlier FY 1996-1998 Demonstration programs that preceded "Mark to Market." For the preservation projects, HUD’s new Notice makes clear that HUD will simply offer to renew these at current rents without restructuring(28), in accordance with the requirements of the preservation plan, since another provision of the new law now makes preservation projects with above-market rents specifically ineligible for the restructuring program(29). In the event that the preservation plan allows the owner to opt-out of the Section 8 contract, HUD will require the owner to continue to comply with the preservation Use Agreement, while providing enhanced vouchers to tenants. Usually, this issue will arise with properties where current Section 8 rents are less than market levels or the levels obtainable under the Use Agreement. For Demonstration projects that already had their mortgages restructured or rents reduced to market, renewals should include an OCAF adjustment. Those Demonstration projects that avoided restructuring at market rents must be evaluated by HUD to determine the propriety of restructuring now.

The new law makes all Section 8 termination notices one year in length, even those at the end of a 5-year contract, whether that contract is chosen by the owner or required as part of a mark-up. Congress also revised some of the requirements mandating content of the notices, specifically removing the requirement that the notice set forth the reasons for the termination and those that had mandated specific content depending on the owner’s intention. HUD’s new Notice includes some sample forms as attachments, with different form notices for owners who intend to renew from those who intend to opt-out. Where owners execute a 5-year renewal contract (subject to appropriations), they would not need to serve any notices during the term of that contract, until one year prior to the end of the term, because the contract is not expiring, and thus there is no "termination" giving rise to a duty to notify. HUD field office project managers are supposed to review the notices for legal sufficiency, and return noncompliant notices to owners for correction, with the 1-year clock starting after service of the corrected notice(30). Short-term extensions generally do not trigger additional 1-year notice requirements, unless they occur following completion of the 1-year period.(31)

Where owners intend to opt-out, HUD also requests that owners continue to provide a written notice to HUD’s local office, to permit adequate time for processing replacement vouchers. The Notice does not require service of this definitive 120-day intention to opt-out on tenants. At the teleconference briefing, HUD staff stated that owners that file notices stating an intent to renew could change their minds during the 1-year period, without filing a new 1-year notice, by giving HUD the 120-day notice of opt-out, but this position appears legally insupportable.

HUD’s Notice provides little guidance about Congress’ new enhanced voucher policy, which makes these special tenant-based subsidies available upon specified conversion actions, including owner opt-outs. Details will apparently be provided in a forthcoming joint Notice issued by the Offices of Housing and Public and Indian Housing. However, clarifying an important ambiguity in the law, the Notice does state that tenants receiving these vouchers may elect to remain in their units, as has been true for tenants receiving them as a result of prepayments since 1996(32). Thus, opt-out owners should have to accept them, protecting tenants against involuntary displacement.

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