National Housing Law Project Housing Law Bulletin

Senate Proposes Limited "Mark to Market"
Demonstration for Section 8 Projects

The Senate's Fiscal Year 1996 appropriations bill¹ includes provisions governing renewals of project-based Section 8 contracts expiring this year and establishing a limited demonstration program to test a variety of approaches to the contract renewal problem beginning in FY 1997.² The House version had included funding for contract renewals, but authorized HUD to convert expiring project-based Section 8 Loan Management Set-Aside (LMSA) subsidies to vouchers, with no direct response to HUD's "Mark to Market" proposal. Both versions would totally deregulate HUD's activities with respect to projects with HUD-held mortgages or ones that are HUD-owned, although the Senate would provide modest funding for repairs or subsidies.

This article briefly summarizes the provisions related to Section 8 contract renewals and Mark to Market.³

Mark-to-Market Demonstration

Section 213 of the Senate bill proposes creation of a "pilot" demonstration program for HUD to test a variety of approaches for dealing with the problem of expiring project-based Section 8 contracts (both New Construction/Substantial Rehabilitation and Loan Management Set-Aside). The demonstration program would not be limited just to buildings with contracts expiring during the next two years; any owner chosen by HUD who agreed to participate would be allowed to. In fact, half of the units must be with Section 8 New Construction/Substantial Rehabilitation contracts expiring after September 30, 1997. However, because the Senate faced an outlay cap that limited its ability to approve spending for "new" uses, the demonstration's effective date is delayed until October 1, 1996.

In contrast to HUD's preferred approach, which was a virtually unlimited demonstration that would have permitted wholesale implementation of "Mark to Market," the Senate bill⁴ includes numerous positive features:

• A 30,000-unit limitation to test the viability of several approaches, including HUD's "Mark to Market";
• A limitation on the demonstration to those properties with contract rents above 110 percent of area Fair Market Rent;
• A requirement for "consent of the residents" to substitute vouchers;
• Selection criteria to incorporate various types of projects with differing occupancy profiles, locations, and financial and physical conditions;
• A set of identifiable goals for the demonstration, including maintaining developments in decent condition, protecting tenants and surrounding neighborhoods, and supporting fair housing strategies; and
• A requirement for ongoing reporting and evaluation to Congress.

However, these strengths are offset by the demonstration's failure to explicitly include:

• Guarantees that the same number of very low- and low-income households will be served by HUD's actions;
• Any assurance that non-performing ownership and management will be terminated;
• A requirement that any HUD actions to deregulate restrictions are evaluated under public purpose goals and that some enforceable restrictions remain (e.g., non-discrimination against voucher holders, original occupancy rules); and
• Adequate resident and community participation requirements (no notice and comment rights on project plans, no earmarked technical assistance funds).

These shortcomings could be addressed by HUD when it actually develops the demonstration, although it may be difficult to convince a reluctant agency to do so. Whether the House will agree to this demonstration approach in the Conference Committee also remains to be seen.

Section 8 Contract Renewal Provisions

The Senate bill appropriates $4.35 billion for renewals of expiring Section 8 contracts,⁵ apparently enough to cover both expiring project-based subsidies and certificate and voucher contracts as well. Approximately 100,000 project-based units will reach the point of contract expiration during FY 1996, almost all of which are Section 8 LMSA units. The House bill had provided funding for LMSA renewals, but allowed HUD unlimited discretion to substitute vouchers.⁶ Section 214 of the bill, as amended on the Senate floor,⁷ establishes new rules governing HUD's renewal of these Section 8 contracts. The committee version had included provisions addressing Mark-to-Market and contract renewals, but the effective dates of both had been delayed for a year because of the outlay caps.⁸ On the floor, floor manager Senator Bond offered an amendment, co-sponsored by Senators D'Amato, Bennett, and Mack, with the support of Senator Mikulski, to address the problem posed by Section 8 contracts expiring this year with no new legislation actually taking effect.⁹ Senator Bond's amendment essentially requires HUD to offer to renew expiring contracts for short terms on a budget-based method, as follows:¹⁰

• HUD must offer to renew all contracts expiring during FY 1996 with budget-based rents or at the current rent, if the current rent is less than 120 percent of FMR, or until HUD develops budget-based guidelines;¹¹
• Budget-based" rents would include debt service, operating expenses, and return on equity;
• Renewal terms would be for no more than two years, but only for one year in the case of Section 8 LMSA contracts;¹²
• HUD and the owner could agree to substitute vouchers, but only tenant notice and consultation — not approval — would be required.¹³

Should Congress fail to enact any provision beyond a funding level for expiring Section 8 contract renewals, current law regarding renewals would continue to apply, which requires HUD to offer renewals up to FMR (perhaps even up to 120 percent),¹⁴ and arguably would require some owners to accept.¹⁵

Developments with HUD-Held Mortgages and HUD-Owned Projects

Continuing a provision first added as part of the FY 1995 rescissions bill,¹⁶ the Senate bill¹⁷ would allow HUD to manage and dispose of these units without any of the existing law's protections. Those protections include minimal planning, management and subsidy requirements upon disposition.¹⁸ This deregulation would mark the end of HUD's property disposition program, and would open the door to unrestricted mortgage sales by the Department. It threatens not just developments and neighborhoods, but tenants of units formerly assisted with Section 8. The breadth of the language would allow deregulation without replacement vouchers for many thousands of units. The Senate bill proposes, however, an appropriation of $261 million to subsidize developments being sold at foreclosure or from HUD's inventory.¹⁹ The House bill contained the same deregulation provision, but no appropriation,²⁰ and the Budget Reconciliation bill under discussion includes outright and permanent elimination of the property disposition program.

1. H.R. 2099, as reported out of the Senate Appropriations Committee on September 13 and as amended and passed on the Senate floor September 27, 1995.
2. The Committee Report accompanying the bill, as it emerged from Committee prior to floor consideration, is S. REP. NO. 140, 104th Cong., 1st Sess. (Sept. 13, 1995). Unless otherwise indicated, subsequent page references are to the bill's post-floor version (Sept. 28, 1995).
3. For background on HUD's Mark to Market proposal, see Status of HUD's "Mark-to-Market" Proposal Remains Uncertain, 25 HOUS. L. BULL. 133 (Aug. 1995). The Senate bill also contains revisions to the preservation program for developments with HUD-subsidized mortgages facing conversion from prepayment. These are described in HUD Preservation Program Survives First Senate Test, 25 HOUS. L. BULL. 150 (Sept. 1995). The floor version of the Senate bill revises the "capital grant" preservation program. Subject to appropriations, tenant-based subsidies would be made available to all very low-income tenants of housing that is prepaid, not just housing that is technically "eligible" for the revised program under a new definition with equity floors and time limits for filing. See H.R. 2099 (Sept. 28, 1995, reflecting Senate amendments), at 121-122.
4. H.R. 2099, § 213, at 98.
5. H.R. 2099, at 36.
6. H.R. 2099 (Aug. 1, 1995, reflecting final House floor action), at 24-25.
7. H.R. 2099, at 107.
8. H.R. 2099, §§ 213 and 214 (Sept. 13, 1995).
9. 141 CONG. REC. S14368-69 (Sept. 27, 1995).
10. The committee version had created further problems beyond its delayed effectiveness by placing FMR limitations on renewals, under which few non-LMSA Section 8 projects could survive. Its report (S. REP. NO. 140, supra note 2, at 72) created further confusion by describing only one-time, one-year LMSA renewals, then conversion to vouchers, and setting two different FMR-based renewal caps (pp. 49 (110 percent) and 72 (120 percent)).
11. It is unclear whether owners of projects with current rents of 120 percent of FMR or less would be entitled to an offer at that level if it exceeds the budget-based figure.
12. Some confusion may linger on this point, since the committee version of the bill, in one place, had limited renewal terms to one year (e.g., H.R. 2099, § 214(a) (Sept. 13, 1995), at 105), while the Committee Report had specified no mandatory term (S. REP. NO. 140, supra note 2, at 54)). This term limitation saves FY 1996 budget authority and may be intended to resolve budget-"scoring" problems for future reforms. It presents no problem so long as funding is renewed in subsequent years and financing is not needed, but both of these are shaky assumptions in the current climate.
13. The bill also permits HUD, "subject to advance appropriations," to offer an owner incentives to agree to convert to tenant-based assistance.
14. 42 U.S.C.A. §§ 1437f(c)(9)-(10) and (v) (1994).
15. 12 U.S.C.A. § 1715z-1b(b)(2) (West 1994) (Section 221(d)(3) BMIR and Section 236 projects: owners' obligation not to interfere with tenants' efforts to get rent subsidies).
16. Pub. L. No. 104-19, 109 Stat. 233 (July 27, 1995).
17. H.R. 2099, at 32.
18. See Brief Summary of New HUD Multifamily Property Disposition Law, 24 HOUS. L. BULL. 79 (Sept./Oct. 1994); HUD Issues Interim Multifamily Property Disposition Rule, 25 HOUS. L. BULL. 98 (May 1995).
19. H.R. 2099, at 31. See also S. REP. NO. 140, supra note 2, at 53 (table).
20. H.R. REP. NO. 201, 104th Cong., 1st Sess. (July 21, 1995), at 27 (table).