National Housing Law Project Housing Law Bulletin

Congress Hammers Preservation Program

Continued from last year's bill are provisions permitting virtually any owner to prepay and convert to market-rate use, special vouchers for affected low-income tenants,² retention of excess rental income, and a minimum equity threshold for program eligibility. Of critical importance is an additional provision requiring HUD to stop processing under the program, which means that any developments that failed to secure plan approval by September 30, 1996, are placed on hold, absent future contrary instructions from Congress.³ Also renewed, albeit with less exclusivity, is the preference for funding sales to nonprofits and tenant groups. Congress has also confirmed HUD's administrative shift to capital grant funding to replace insured loans and Section 8, expressly limiting financing to the capital grant (or "capital loan") mechanism and repealing the Section 241(f) insured loan program.⁴

Here is a quick summary of the major changes from this year:

• A funding level of only $350 million, compared with a total of $500 million provided by the Senate bill and zero from the House;
• A federal cost cap for sales at seven times the local fair market rent (FMR),⁵ with HUD discretion to approve higher grants, and lifting of current ban on using HOME and Tax Credit funds; and
• Possible repeal of the existing tenant protections in Section 223 of Title VI⁶ where prepayment vouchers are provided.

Allocation of funds. From the $350 million in total funding, up to $100 million will be set aside for special prepayment vouchers to protect tenants residing in buildings where owners exercise their option to prepay and convert. HUD will have to determine whether this full amount will be needed and how and when to allocate any excess to the unfunded sales queue.

An additional $75 million must be made available for the "carveouts" specified in last year's bill. These are mostly projects whose owners seek to extend their participation that were: (1) subject to negotiated agreements between the owner and HUD settling disputes concerning the owner's regulatory compliance, (2) located in disaster areas where the disaster delayed commencement of HUD processing, or (3) subjected to delayed processing due to differing interpretations concerning the effect of local rent control on project appraisals. HUD will have to decide which projects within these categories should receive this funding, in particular whether sale projects should be included.

HUD also has the discretion to use up to $10 million for reimbursement of owner transaction costs for approved but unfunded plans of action. While HUD may choose to use these funds instead for approved sale plans, these statutory directives leave only a minimum of $165 million for funding the almost $1 billion worth of sales currently in the funding queue as of the end of August. Also waiting for funding are hundreds of projects with approved extension plans which Congress has kept on ice over the recent past.

Federal cost limit. The sales cap of seven times the local FMR must use published FMRs for FY 1997. Priority purchasers may now seek HOME and Tax Credit funds, although it is unclear whether this authority extends to developments unable to receive Title VI funding due to the size of the queue or inability to reach plan approval prior to the processing freeze, or is instead limited to those whose closing under Title VI is adversely affected by the cost limit.⁷ HUD must give project purchasers affected by the new cap until March 1, 1997, to submit revised plans. The purchasers may retain their current funding priority, so long as any additional funding commitments are secured by August 1, 1997.

Tenant protections. The new language governing tenant protections raises a number of issues that HUD will have to settle shortly with administrative guidance. This task is complicated by the absence of any legislative history, as these revisions appeared without explanation in the final Conference Report or on the floor.

First, HUD must decide whether the language that "assistance made available … [prepayment vouchers] shall be in lieu of the tenant protections in Sections 223(b), (c) and (d) of [Title VI]"⁸ provides tenants with a choice of accepting either the prepayment voucher or the Section 223 protections, or whether the provision of these special vouchers for those eligible automatically replaces the prior protections, despite the fact that those protections were not explicitly repealed.

Second, where prepayment vouchers are used by affected residents, HUD must decide whether those tenants have the right to remain in their units or move from the property. For these tenants, Congress has removed the former requirement of Section 223(d) that prepaying owners cannot discriminate against voucher holders because of their status as recipients of tenant-based assistance.⁹ On the other hand, this law's language creating the prepayment voucher states that "the tenant may elect to remain . . . or to move. . . ." How HUD resolves this issue of potential displacement by owner choice will affect the housing opportunities of thousands of families.

Third, HUD has to determine the effect of removing the term "unassisted" in describing which low-income families are eligible for the new vouchers. Likely interpretations include: allowing current Section 8 tenants to trade their current Section 8 for prepayment vouchers, or providing prepayment vouchers to tenants from the preservation funding pool if any current Section 8 assistance (tenant-based or Loan Management Set-Aside) expires, or allowing rent increases during the first year following prepayment. In this regard, HUD will also have to decide whether to adhere to its previous positions regarding terms and termination provisions for Section 8 LMSA subsidies.¹⁰

Preservation advocates now have no choice but to seek additional funds via supplemental appropriations, or the FY 1998 budget and appropriations process, and a lifting of the processing freeze. Perhaps a new Congress would be more receptive to the logic of preservation, which always makes sense unless the plan is to reduce the number of assisted families down the road. Does the Congress know something they haven't told the public?

1. H.R. 3666, HUD-VA-IA Appropriations Bill for FY '97, Pub. L. No. 104-204, ___ Stat. ___ (Sept. 26, 1996). The language revising the preservation program is contained in numerous "provisos" under the heading "Preserving Existing Housing Investment", rather than specific sections of the bill. The Conference Report and Joint Explanatory Statement on the legislation is H. REP. NO. 812, 104th Cong., 2d Sess. (Sept. 20, 1996). The preservation provisos are at pages 4-6 and a brief explanation at pp. 57-58.
2. Under this year's language, subject to funding availability, prepayment vouchers should be made available to any low-income families in residence on the date of prepayment, or any moderate-income families that are elderly or disabled or residing in low-vacancy areas, but only if a rent increase within the first year following prepayment increases their rent burden to more than 30 percent of their adjusted income. The expansion of eligibility to these moderate-income tenants is new, though few may pass the other eligibility threshold concerning the rent increase burden due to their relatively higher incomes. These vouchers will cover the difference between the rent level as of prepayment and the new rent, so long as that new rent passes the PHA's rent reasonableness test. Tenants must always pay at least the former rent, regardless of whether it exceeded 30 percent of income. Tenants may remain or move, but voucher assistance for those who move will convert to the PHA's normal payment standard and will remain shallow (based on the movers' former contribution).
3. Excepted from the processing freeze are buildings in the "carveout" categories reviewed infra.
4. H.R. REP. NO. 812, supra note 1, at 5.
5. The cap is set lower for the carveout extensions, at six times FMR, and the capital loan is limited to no more than the approved cost of rehabilitation plus 65% of the owner's preservation equity. Id. at pp. 5-6.
6. These include a three-year rent increase protection (except for operating cost increases) for "special needs" tenants or for tenants in low-vacancy areas, a requirement that owners pay half of tenants' relocation costs, and a ban on discrimination by owners against voucher holders. 12 U.S.C.A. § 4113 (West Supp. 1996).
7. A literal interpretation would permit any "priority purchaser" to use HOME or Tax Credit funds, regardless of whether Title VI funds are part of the transaction.
8. H.R. REP. NO. 812, supra note 1, at 5.
9. 12 U.S.C.A. § 4113(d) (West Supp. 1996).
10. Memorandum for Directors of Housing et al., from Nicolas P. Retsinas, Re: Implementation of Housing Opportunity Program Extension Act, etc. ("Preservation Letter No. 6," July 1, 1996), p. 7 (Q & A No. 16). For LMSA contracts, the owner cannot terminate until the contract expires by its own terms. Such termination must be preceded by a one-year notice. 42 U.S.C.A. § 1437f(c)(9) (West Supp. 1996). Should that contract be subsequently lawfully terminated, affected tenants should receive replacement tenant-based subsidies under the funds appropriated annually and the governing authorities for Section 8 contract renewals. See, e.g., the provisions governing Section 8 contract renewals in this same law, Pub. L. No. 104-204, supra note 1, § 211(b)(5), reprinted at H.R. REP. NO. 812, supra note 1, at 12.