National Housing Law Project Housing Law Bulletin

HUD Issues Implementing Notice
for Public Housing Conversion—
Public Review and Comment
Will Be Crucial

HUD is about to begin implementing that statute. It has identified 127 projects nationwide that are candidates for conversion.² Those projects contain about 90,000 units and are located in 82 different cities around the country. Demolition applications have already been approved for 23 of the projects which contain 14,000 units. Similar applications are also pending for another nine projects with 3,500 units. Thus 17,500 of the 90,000 units are almost guaranteed to be demolished. Another 27 projects with 22,000 units have HOPE VI implementation grants and thus are not likely to be "vouchered out." However, most of the HOPE VI plans call for extensive demolition and fewer units for poor people after the work is completed.

The greatest concern at this stage has to be with the remaining 68 projects. Fifty-seven of them, containing about 40,000 units have no plans pending at HUD and are strong candidates for being vouchered out. Another 11 projects, with about 8,500 units, have HOPE VI planning grants, but HUD's Notice still requires that they be considered for vouchering out.³ Thus, beyond the 17,500 units that are almost certain to be lost through demolition, there are an additional 48,000 units that will be lost through conversion, if they are not watched closely. The largest numbers of those units are in Chicago (12 projects with 12,500 units), New Orleans (9 projects with 6,850 units); Puerto Rico (7 projects with 5,000 units); Pittsburgh (6 projects with 3,500 units); and Philadelphia (5 projects with 3,100 units).

The statute requires the PHAs to identify developments that: (1) have more than 300 dwelling units; (2) are on the same or contiguous sites; and (3) have vacancy rates of 10 percent or more for units not in funded, on-schedule modernization. For each of those developments, the PHA must determine whether it is distressed and whether the PHA can assure its long-term viability through such measures as reasonable revitalization, reducing the number of units or achieving a resident income mix. If not, the PHA must convert the development to vouchers, unless the cost of continuing to operate it as public housing would be less than the cost of providing vouchers to all families in its occupied units. PHAs are granted five years to remove the units from their inventory.⁴

Because the statute requires HUD to begin implementation during Fiscal Year 1996, HUD has published the Notice directing how it is to be implemented. The Notice requests public comments and sets November 25, 1996, as the deadline for receiving them. In HUD's view, an opportunity for meaningful comment exists despite the fact that the Notice takes effect immediately, because it will not be until December 1996 that PHAs will have to begin making the crucial and difficult determinations that will decide whether a development will have to be vouchered out.

Tenants and tenant organizations should be informed of the implementing Notice and its potential to set in motion the loss of large numbers of units from the ever-shrinking public housing stock. It would also be valuable for them to send comments to HUD about the effect of the Notice on their communities, because such first-hand information may encourage HUD to add provisions protecting tenants' interests.

A Summary of the Process

Stage 1. The Notice divides the process into three stages.⁵ By December 29, 1996, PHAs will have to identify each of their developments that have 300 or more units on the same or contiguous sites. They will also have to determine which ones, if any, have 10 percent or higher vacancy rates among units that are not funded and on schedule for modernization. The vacancy rate data is to be taken from Public Housing Management Assessment Program (PHMAP) data.

In addition, before December 29, each PHA will have to calculate whether the costs of continuing to operate any development that is 10 percent or more vacant would exceed the cost of providing vouchers to the families in the development. This calculation will be more difficult and be guided by somewhat less precise standards than the initial calculations of the 300 units and the vacancy rate. Some of the difficulties in the calculation are discussed below. The important thing now is to be prepared to review these calculations for the buildings in your area between now and December 29, 1996.

Stage 2. If a development has more than 300 units, has a 10 percent or greater vacancy rate, and would be more expensive than vouchers, it proceeds to Stage 2. Stage 2 must be completed by February 27, 1997. In this stage, PHAs complete the most difficult determinations, i.e., whether the project is distressed and whether its long-term viability can be assured through such measures as density reduction, renovations or achieving an economic mix. If a project is not distressed or its long-term viability can be assured, it does not have to be vouchered out, so these will be crucial determinations.

HUD's Notice is not that helpful on this stage, if one's perspective is to save as many developments as possible. With regard to "distress," the Notice states that all projects entering Stage 2 will be presumed to be distressed, without any further analysis.⁶ That leaves open the possibility that some 300-unit projects that are 10 percent vacant will have to be subjected to the long-term viability determination, even though they are not distressed. The Notice does allow a PHA to make a special showing to HUD officials that a project is not distressed despite the presumption.⁷ However, it provides no guidelines to PHAs regarding what they must demonstrate, nor to HUD officials deciding whether a PHA's demonstration is sufficient. One cannot be encouraged that any projects will be saved from conversion because they are not distressed.

On long-term viability, the Notice requires a showing that the project probably:

1. Will be structurally sound for 20 years;
2. Will have sound systems for 20 years;
3. Will be fully occupied for 20 years;
4. Will not be excessively dense when compared to similar housing in the community;
5. Will not have an excessive concentration of very low-income families; and
6. Will not have any other clearly disqualifying site impairments.⁸

If a project does not meet those criteria in its current condition, the PHA must show what steps it will take to make it pass these six tests. The steps HUD mentions are reasonable revitalization, density reduction and economic mix. They come from the examples in the statute. The Notice sets out criteria for judging whether those steps are realistic.⁹

For revitalization as a solution, the PHA must demonstrate:

1. That the costs are reasonable, i.e., no more than 90 percent of the total development costs;¹⁰
2. That any unusually high operating costs will be reduced;
3. That the post-revitalization costs will be less than voucher costs for the same number of units, unless there is some extraordinary justification for the higher costs; and
4. That funding is likely to be available when needed.

If the post-revitalization costs would exceed voucher costs, the Notice would permit an exception for special circumstances that demonstrate the desirability of retention of the housing as revitalized public housing. The Notice suggests as an example the need to revitalize a development to enhance neighborhood viability.

For density reduction to be an accepted solution, the PHA must show that the density will be brought down to a level approaching that in the community. The larger a project is, the more skeptical HUD will be that density reduction will solve the problem.

On economic mix, the PHA will have to explain that the location of the project will not make it unrealistic to expect higher income people to move in. If the project is large and predominantly serves extremely low-income families, the PHA will have to show that, over time, a significant number of working families will be living in the project. As an example, HUD suggests at least 25 percent of the tenants be in the 30-to-50-of-area-median-income range. That example is unrealistic because in many places, 30 percent of median income is twice the minimum wage and four times the welfare grant levels. Many projects can have a significant number of employed families without having any tenants in the 30-to-50-percent-of-median range. As with density, the larger the project, the more skeptical HUD will be that economic mix will work.

If a project has an approved and funded HOPE VI plan, HUD will presume that its long-term viability is assured and will not require it to be vouchered out. However, if a project has only a HOPE VI planning grant or is merely applying for a planning grant, it will have to run through the tests for vouchering out. If it fails the standards of the Notice, it will have to be vouchered out, even if it is in the middle of the HOPE VI planning grant.

Stage 3. When Stage 2 is completed, the PHA will then have to develop a conversion plan for each project that has failed all the tests, i.e.:

1. That it has 300 or more units on the same or contiguous sites;
2. That it is 10 percent or more vacant;
3. That it would cost more to continue as public housing than the cost of providing Section 8 for the occupied units;
4. That it is distressed; and
5. That it cannot be assured of long-term (20-year) viability because:
   1. It will not be structurally sound for 20 years; or
   2. It will not have sound systems for 20 years; or
   3. It will be more dense than the surrounding neighborhood; or
   4. It will have an excessive concentration of very low- income tenants, i.e., tenants with incomes below 50 percent of area median income; or
   5. It has some other site impairment; or
   6. The costs of revitalizing it are too high; or
   7. It has some operating costs that cannot be reduced; or
   8. Its continuing costs of operation exceed the costs of providing Section 8 for the same number of households.

If a project flunks any one of the eight tests regarding continued viability, it must be vouchered out.

The vouchering-out plan must be completed by August 26, 1997. It must:

1. List the buildings to be vouchered out;
2. Provide for the relocation of tenants as soon as is practicable;
3. Specify the number of families to be displaced and the number of bedrooms they will need;
4. Indicate any public housing units that will be available for relocated households and the Section 8 that will be needed;
5. Identify any funds previously committed to the development and state whether they should be used for Section 8 or other uses;
6. Schedule the relocation and removal of the units from the PHA's inventory;
7. Provide for notification of the families and assure them that they will be relocated to decent housing of their choice to the maximum extent possible; and
8. Record how the PHA will consult with the tenants and the local government.¹¹

The end result of the plan will be that the project is taken off the Annual Contributions Contract (ACC) and will not receive any more HUD funding. PHAs that are going to convert projects are given until October 21, 1996, to apply for a share of the FY 1996 certificate and voucher funding to use for families displaced by the conversion.¹² In addition, if any Comprehensive Improvement Assistance Program (CIAP), Comprehensive Grant or Major Rehabilitation of Obsolete Project (MROP) funds have been committed to the project, they may be shifted over to fund certificates and vouchers, if existing certificate and voucher funds are inadequate. If the funds are not needed for certificates or vouchers, HUD may, but does not have to, leave them with the PHA for other projects. The operating subsidies that are attributable to converted projects do not get converted to certificate or voucher funding. They are just lost.

HUD's role. If a project is likely to be identified as one to be converted, HUD is given authority to direct the PHA to cease any spending on it beyond what is needed to keep it decent, safe and sanitary.¹³ In the Notice, HUD indicates that it will be most concerned about cases in which PHAs are scheduled to spend substantial modernization funds on a project that may very well end up being vouchered out. HUD has directed its field offices to review projects that are subject to the conversion statute and recommend whether spending on them should be frozen.

In cases where PHAs ignore the statute and the Notice and do not determine whether their projects fit the criteria for conversion, HUD itself has authority under the statute to determine whether the projects should be converted.¹⁴ In addition, if a PHA proceeds with the determination but concludes that a project should not be converted or fails to convert a project that it determines should be converted, HUD is required to step in and ensure that the project is removed from the PHA's inventory.¹⁵

To carry out this responsibility, HUD is sending teams of consultants out to analyze what it considers the 50 worst developments. Their responsibility will be to make independent viability determinations concerning those developments. If a PHA does not come to the same conclusion as the consultants, it appears that HUD plans to use the consultants' determinations to decide whether to force removal of the buildings from the inventory. No doubt it will also be using their initial conclusions to decide whether to freeze spending on any of these projects.

Criticisms of the HUD Notice

Comparing costs. Under the Notice, comparing the costs of continuing the project as public housing and the costs of Section 8 is significant at two points. First, in Stage 1, projects could avoid being vouchered out and even avoid being moved to Stage 2 if the cost of continuing them as public housing were less than the cost of providing Section 8 for all current residents. Second, in Stage 2, if revitalization is proposed as the tool to assure long-term viability, HUD will accept it only if the continuing cost for the public housing units is less than the cost of an equal number of Section 8 units.

It seems that the cases where public housing is cheaper than Section 8 at Stage 1 will be very rare. That is because the comparison is between the costs of preserving all the units in a public housing project with the cost of providing Section 8 only to the tenants in the occupied units. Because at least 10 percent of the public housing units in these developments are vacant, continuing as public housing begins the process with a handicap of at least 10 percent. If the vacancy rate is higher, the handicap is even greater. If the project is 100 percent vacant, the Section 8 costs would be zero and the project would always have to proceed to Stage 2.¹⁶

Not only does the comparison between total units and occupied units handicap public housing, the standards HUD directs the PHAs to use for calculating the costs of each possible option seem also to favor the Section 8 alternative. On the Section 8 side, HUD uses the current Section 8 Fair Market Rent, with no adjustment for increases of the fair market rent (FMR) over the 20-year comparison period. On the public housing side there also is no adjustment for inflation of public housing costs, but historically public housing costs have not inflated at the same rate as have Section 8 FMRs. Thus, the failure to adjust for inflation on either side works to the advantage of the Section 8 option.

It also appears that HUD is double counting capital costs on the public housing side. Under the Notice, the PHA has to count both the costs of modernizing the project at the beginning of the 20-year period and the costs of saving for a second modernization at the end of the 20 years. Those costs should be counted only once for a 20-year period.

In Stage 2, HUD's test is less biased, because it at least compares the cost of subsidizing the same number of families with both options. But the failure to adjust for inflation and the double counting on the public housing capital costs will continue to weigh heavily against public housing. The result of these handicaps for the public housing alternative will mean that more projects will have to be vouchered out than otherwise would be the case.

Tenant consultation. The statute requires the PHA to consult with "the applicable public housing tenants" when it goes through this process.¹⁷ The Notice, however, does little to implement that requirement. It merely recites that the conversion plan shall include "a record indicating compliance with the statute's requirements for consultation with applicable public housing tenants of the affected development. . . ."¹⁸ Requiring a plan to include a record is a rather passive and somewhat backward way of ensuring that tenants are consulted.

The Notice should affirmatively explain to the PHAs what they will have to do comply with the consultation requirement. Each stage in the conversion process presents a critical juncture where resident input should be prescribed. At Stage 1, residents of the projects undergoing identification and other affected developments into which tenants may be displaced — as well as residents of the surrounding area and persons on the waiting list — should be notified about what is going on. Although the assessments in Stage 1 might appear mechanical, there are likely to be factual disputes about the vacancy rate, the number of units in modernization, whether the modernization is on schedule, and most crucially, whether a project's costs would exceed voucher costs. The Notice should explain the three stages, the determinations that need to be made during each, the time frames for completion and the consequences of a determination to convert. Relevant information should be shared with the tenants both orally and in written form, and residents should be afforded an opportunity to present their views to the PHA both in writing and at meetings held to discuss the matter.

In Stage 2, consultation with affected tenants is even more critical. That is the stage when the final determination is made whether or not to save the project. The determination will turn upon assessments of whether the project is viable in its present state or can be made viable with particular actions, including renovations, density reduction or economic mix. The affected tenants will have a lot to say on these issues because the decision will determine where they will live and, in some cases, whether they will have any place at all to live. The Notice should direct PHAs to give affected tenants full access to all the relevant information during this stage, to ensure them any technical assistance that may be needed to present their positions, to grant them a fair opportunity to present those positions and to give full consideration to the positions presented by the tenants.

Even if the final determination is to convert the project, tenant consultation should continue on into Stage 3. That is when the conversion plan is developed. A major component of that plan is the relocation of tenants who will be displaced by the conversion. Given the record so far of PHAs' inability to handle displacement of public housing tenants in ordinary public housing demolition cases and under HOPE 6, it is vital that tenants be consulted when the plans for their relocation from converted projects are being developed.

Relocation planning to mitigate the hardships of displacement. The Notice falls far short of the legal requirements the PHAs must follow when they are displacing people from their homes. It does not mention the Uniform Relocation Act (URA).¹⁹ It should make it clear that that Act applies to relocations carried out under the mandatory conversion statute. The URA guarantees, among other protections, relocation to decent, safe and sanitary affordable housing that is accessible to jobs, as well as early planning to ensure that such housing will be available to all displaced families. It also requires that any displacement be carried out in accordance with the requirements of the Fair Housing Act.²⁰

The Notice requires the conversion plan to provide information only on the number and size of the households to be relocated. It fails to require other relevant demographic information such as income, race, and disability status that will be critical to an effective relocation process. The Notice requires that relocation resources be identified, but does not address the issue of the ability of the relevant market to absorb an influx of vouchers or the adequacy of the vouchers to cover prevailing rents in the area.

What happens to the converted project? One of the deficiencies of the Notice is that it sets no rules on what will happen to the buildings after they are converted. One could infer that Congress expected that conversion would mean that the buildings would be torn down or sold for some other use, and that they would no longer be used by the PHA to house poor people. The Notice, however, does not say that that is what must happen. It merely says that they will be taken off the ACC and removed from the PHA's inventory. It also explains that if they are demolished, the demolition will not be subject to the ordinary rules on demolition in Section 8 of the United States Housing Act,²¹ and, if the projects are sold, they will have to go through the normal Section 18 rules on public housing sales.²²

It is possible, however, that a PHA may just leave a converted building standing vacant, boarded up to lessen vandalism, but nonetheless destroying the neighborhood around it. The Notice does not prohibit the PHA from doing that. One may assume that Congress was concerned not merely about continuing the waste of federal funds subsidizing projects that no longer provide decent housing, but also about not leaving deteriorated buildings built with federal funds to destroy neighborhoods. The Notice should carry out Congress' likely concerns on this latter issue.

It is also possible that a PHA may remove a building from the ACC, but continue to rent it out without federal operating subsidies or federal controls. Most of these buildings would not be economically viable without federal operating subsidies, especially not over the long run, but in desperately tight housing markets some PHAs may try to make a go of it for a few years once the federal rent restrictions, as well as any federal maintenance duties, are lifted. Unlike ordinary slumlords, the PHAs would not even have to make mortgage payments. The Notice should also address how to deal with this possibility.

Where will the certificate and voucher money come from? The statute describes this process as the "conversion of Public Housing Projects to Vouchers."²³ In reality. however, that is not what is going on. It is more a case of closing certain public housing projects. There will be not be any long-term increase in the number of families assisted under the voucher program to offset the number of public housing units that are closed.

Here is how it will work. When a project is "converted," the public housing operating subsidies for its units will be terminated. The federal capital subsidies that were used to build the project and modernize it in the past will be written off, because the building will no longer be on the ACC and used as public housing. Any future modernization funds that might have been allocated to the building will not be allocated because the building will not be part of the public housing inventory. In addition, calculations of future public housing modernization needs and appropriations will be reduced because these public housing units will no longer exist. Thus on the public housing side, there will substantial cuts in public housing funding to reflect the elimination of these units.

There will not, however, be an equivalent increase in funding on the certificate and voucher side to offset this loss of public housing units. The only use that will be made of certificates and vouchers because of the "conversion" will be to take care of families currently living in the buildings. Some of those families, however, will never see any certificates and vouchers, because, as the Notice makes clear, displaced families can be relocated to other public housing developments or vacancies in private assisted housing.²⁴ For the families for whom those alternatives do not work, there is the possibility of Section 8, but that Section 8 will come out of the $400 million already appropriated in FY 1996 for certificates and vouchers, not from new certificate and voucher money made available because these buildings are being closed.²⁵ If that appropriation covers all the needs of the families being relocated, there will be no additional Section 8 units to offset the loss of these public housing units.

If the FY 1996 appropriation is insufficient, then there is the possibility that CIAP, Comprehensive Grant and MROP funds previously allocated to the public housing buildings will be converted to Section 8.²⁶ That, however, raises the question of which funds will be used to cover these Section 8 certificates in year two and thereafter. The CIAP, Comp Grant and MROP funds are one-time only appropriations. After they are used up, Congress is not going to appropriate more of these funds to be converted to Section 8 to cover a second year. More likely, the certificates created by the conversion would be folded into the ordinary Section 8 funding stream and supported in the future by appropriations for Section 8 renewals. However, given the budgetary pressures that Section 8 renewals are beginning to cause, it is quite possible that Congress would allow Section 8 assistance to be renewed only for as long as the families that first moved out of public housing with that assistance continued to need it. Congress may decide that Section 8 should not be renewed when those families leave the program. That would follow the precedent in FY 1996 of Congress requiring that reissuance of certificates and vouchers be delayed for three months and its limiting of Section 8 Loan Management Set-Aside (LMSA) renewals to families in residence on September 30, 1996. In fact, however Congress treats these renewals, it will use the device of delaying reissuance to cut back on Section 8 outlays to meet its budgetary constraints. The net effect in any housing market will be that fewer families will be assisted than before and, most likely, that nothing will be provided to make up for the loss of the "converted" public housing units.

1. HUD Notice, 61 Fed. Reg. 50,632 (Sept. 26, 1996), Assessment of the Reasonable Revitalization Potential of Certain Public Housing Required by Law; Departments of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act, 1996 (hereafter "HUD FY 1996 Appropriations Act"), § 202, enacted as part of Pub. L. No. 104-134 (known as the Omnibus Appropriations Act for Fiscal Year 1996 or the Balanced Budget Downpayment Act), 110 Stat. 1321 (Apr. 26, 1996).
2. HUD, Assessment Sites (Sept. 20, 1996). (The figures in the following two paragraphs are taken from that HUD document.)
3. HUD Notice, 61 Fed. Reg. 50,634.
4. For background, see HUD FY 1996 Appropriations Act (H.R. 3019) Contains Important Substantive Changes, 26 HOUS. L. BULL. 66, 67 (May 1996).
5. HUD Notice, 61 Fed. Reg. 50,633-35.
6. Id., 61 Fed. Reg. 50,633.
7. Id.
8. Id. at 50,633-34.
9. Id. at 50,634.
10. The methodology for calculating the maximum total development cost is set out at 24 C.F.R. § 941.406 (1995).
11. HUD Notice, 61 Fed. Reg. 50,634-35.
12. Id. at 50,635.
13. Pub. L. No. 104-134, § 202(c)(6).
14. HUD Notice, 61 Fed. Reg. at 50,635.
15. Pub. L. No. 104-134, § 202(b)(3).
16. This comparison of apples and oranges is not HUD's fault. Congress wrote the statute that way.
17. Pub. L. No. 104-134, § 202(b)(2).
18. 61 Fed. Reg. 50,635.
19. Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended, 42 U.S.C.A. §§ 4601 et seq. (West Supp. 1995).
20. 42 U.S.C.A. §§ 3601-31 (West 1994).
21. Pub. L. No. 104-134, § 202(e)(3).
22. HUD Notice, 61 Fed. Reg. 50,635.
23. Pub. L. No. 104-135, § 202 (Title).
24. HUD Notice, 61 Fed. Reg. 50,634.
25. Id. at 50,635.
26. Id.