National Housing Law Project Housing Law Bulletin

HUD Authority to Provide Up-Front Grants When Selling HUD-Owned Properties

Recently, Congress, by withdrawing subsidies and deregulating HUD's legal responsibilities, has abandoned most responsibility for providing solutions for troubled properties that ultimately face foreclosure or disposition by HUD. HUD has actively been disposing of most properties with no subsidies and inadequate repairs and use restrictions, essentially tossing these buildings onto the open market with vouchers for some tenants. For the past few fiscal years, however, Congress has also provided one important tool, permitting HUD to make up-front rehabilitation grants to purchasers of HUD-owned property, but that authority was limited to Fiscal Years 1997 and 1998. HUD has implemented this authority by providing limited grants from the mortgage insurance fund for rehabilitation of some formerly subsidized properties. In Section 206 of this year's appropriations act, Congress has extended this tool for another year, through FY 1999.² It is unknown, however, whether HUD will continue to use the same guidelines to distribute these funds.

Notices for Prepayments

Section 219 of the Act³ does two things. First, it seeks to expressly authorize owners of properties that are "eligible low-income housing" under the defunded preservation programs to convert to market by prepaying their mortgages or terminating their mortgage insurance. This express authorization had existed during FYs 1996 and 1997, but was omitted from the FY 1998 appropriations bill and never corrected, as HUD took the position that prepayments were legal anyway. Second, because of the efforts of Senator Paul Wellstone and primarily his Minnesota constituents, Section 219 requires these same prepaying owners to satisfy several conditions, including a prior notice requirement. Formerly, since prepayments were first permitted beginning in FY 1996, HUD had taken the position that it lacked any authority to require owners to provide any notice to tenants or to HUD prior to prepayment. This new notice, which hopefully HUD will require in written form, will provide some advance warning to tenants and communities interested in developing alternatives to conversion, or at least to HUD so that more timely provision of tenant-based assistance can occur.

Section 219's notice requirements include: (1) the prepayment or termination must be consistent with the terms of the mortgage or insurance contract; (2) the owner must agree not to increase rents for 60 days after the prepayment or termination; and (3) the owner must provide a notice of intent to prepay to each tenant, to HUD, and to the local government, at least 150 days (about five months) but not more than 270 days (about nine months) before the prepayment or termination. There are several specified exceptions to this notice requirement, including those prepayments that occur within 150 days of enactment (i.e., around March 21, 1999), those necessary to effect a transfer to a priority purchaser (as defined under the preservation program), and those where the prepayment is part of a transaction that will ensure that the property continues to operate on prevailing terms and conditions until the maturity date of the loan.

The final version, reflecting pressure from both owners and HUD for less protection for tenants and communities, is a far cry from the one-year-notice provision in the Senate version of the bill. Whether the exemption language will cause a wave of prepayments during the five-month period of delayed applicability remains to be seen. For any prepayments that do not close within this window, owners subject to the new notice requirement that file a notice but then do not close within 270 days after prepayment will apparently have to file a new notice.

Notices of Project-Based Section 8 Expiration and Termination

Section 549 of the Act⁴ again revises the required written notice owners must provide for expiration and termination of project-based Section 8 contracts. For many years Congress required this notice period to be one year, but in June 1997 it was reduced to 180 days.⁵ This law generally restores the one-year-notice requirement, with one exception. If HUD develops, and an owner agrees to, a new five-year renewal contract subject to annual appropriations, owners would not have to serve the annual notice of contract expiration. Instead, these owners must give only a 180-day written notice to HUD and the tenants prior to the termination (presumably, of the five-year renewal contract term).

This section carries forward some existing legal requirements. First, the notice requirement applies to any "termination," including both owner refusals to renew ("opt-outs"), as well as expirations of the contract term. Second, the notice must set forth the reasons for the termination with enough detail for HUD to determine whether the termination is lawful and whether there are additional actions HUD can take to avoid the termination. The notice must also include a statement that the owner and HUD may agree to a renewal, thus avoiding the termination. (HUD may establish additional requirements for the notice.)

Where owners intend to renew their contract when it expires, the law also requires the one-year notice to specify certain information, such as (1) the owner's intent to renew the contract for another year, (2) the fact that renewal may depend upon Congress providing sufficient funding, (3) a statement that the notice does not indicate an intention to terminate by either the owner or HUD provided funds are available, and (4) that HUD will provide tenant-based assistance in the case of nonrenewal. Unaddressed is the logical question of where HUD would find the funds for this assistance when it lacks the funds for a similar one-year project-based renewal.

Section 549 also amends the Multifamily Assisted Housing Restructuring and Affordability Act of 1997 (MAHRA)⁶ provision concerning the required one-year notice for owner nonrenewals of "Mark to Market"-eligible properties, adding an additional 120-day written notice where an owner subsequently decides to terminate a Section 8 contract. Unclear are the circumstances where such a withdrawal would be permissible, since owners executing a restructuring plan must agree to accept project-based renewals for at least 30 years. Possibly this amendment covers owners whose restructuring plans include a voucher conversion as a result of the Participating Administrative Entity's (PAE's) decision, or possibly "opt-outs" by owners of properties that are eligible for restructuring but who decline the opportunity.

Section 549 also repeals the following requirements of existing law, which require:

• the owner to provide an additional 90-day notice of any rent increase that might occur on termination of the project-based contract, and
• HUD to review the owner's termination notice and adjust the rents if necessary, and to issue written findings.⁷

The subsection restoring the one-year-notice requirement for all terminations and repealing the current second notice requirement for post-expiration rent increases is effective immediately, but all of the other related provisions just discussed are subject to the delayed applicability provision (Section 503)⁹ contained in Title V of the Act (Public Housing and Tenant-Based Assistance). This postpones the effective date of the requirements until October 1, 1999, concerning the content of the notice for an owner who intends to renew, the new five-year contract option, and the requirements of HUD review and findings, unless HUD issues an earlier implementing Notice.

Tenants' Right to Organize in Section 8 Properties

Over the past few years, tenants in HUD-subsidized and -assisted developments attempting to organize independently have experienced repeated harassment from owners and managers, including recent arrests on criminal trespass charges of organizers working with tenants in Dallas and Los Angeles. Thanks largely to the efforts of Senator D'Amato, Section 599 of the new law¹⁰ extends the statutory right to organize beyond the HUD-subsidized properties covered by current law¹¹ to buildings with Section 8 project-based assistance or that receive enhanced vouchers after a prepayment. While Congress had earlier specified a major role for tenants in the "Mark to Market" program, HUD had expressed some doubts about its authority to protect the organizing process in Section 8 properties because of the lack of express statutory coverage. Hopefully these barriers have now been removed, and HUD can now move to finalize strong and effective protections for these essential rights.

Tenants' Right to Good Cause for Eviction in Section 8 Properties

The final version of the law does not contain an earlier provision in both the House and Senate versions which would have repealed good cause for eviction protections. In fact, Section 599's extension of coverage for organizing also has the added benefit of safeguarding the current regulatory right to good cause eviction protections from future administrative dilution, since it is one of the rights established by the 1978 statute that is now extended to Section 8 and prepayment "enhanced voucher" properties.

Enhanced Vouchers for Prepayments

Many tenants residing in certain HUD-subsidized properties where the mortgage loan is prepaid have been eligible to receive so-called "enhanced vouchers" (actually either type of tenant-based assistance, certificates or vouchers) to prevent immediate displacement under the FYs 1996, 1997 and 1998 appropriations acts. These special vouchers require the PHA to set the maximum allowable payment standard or rent subsidy at the actual market rent for the unit, so long as that rent passes the PHA's "rent reasonableness" test. The owner is also obligated to accept these subsidies, at least for the first year after prepayment. Again for FY 1999, Congress has authorized and provided funding for enhanced vouchers.¹²

In addition, Congress addressed one of the problems that has arisen for these residents, namely the ability to obtain rent decreases if the household's income should later fall. The enhanced voucher law previously included a minimum rent provision, requiring tenants to continue to pay at least what they had been paying prior to the prepayment. For tenants who had previously been receiving an income-based subsidy (such as project-based or tenant-based Section 8) — and who elected to convert to the enhanced voucher once the post-prepayment rents were effective or the project-based Section 8 contract expired and was not renewed by the owner — HUD had interpreted this minimum rent provision to freeze the rent contribution for these tenants, so that they could not obtain a rent and subsidy adjustment when their incomes later fell. In this statute, Congress clarifies that, for tenants receiving enhanced vouchers, some relief is available. For tenants whose income "declines to a significant extent," their rent contribution should not exceed the greater of 30 percent of income or the percentage of income paid for rent at the time of prepayment.¹³

This means that tenants who were on an income-based subsidy at the time of prepayment should be able to retain that status under the enhanced voucher subsidy and receive reductions in their rent share through subsidy increases when their incomes fall. How HUD will interpret the threshold requirement of "significant decline" is anybody's guess, and could present more problems for these tenants. Note that the language of the statute may also provide some relief to tenants who were paying a subsidized "basic rent" prior to the prepayment, in that if their income later falls, their burden cannot exceed the greater of the percentage rent burdens specified. Thus, for tenants paying 50 percent of income prior to the prepayment whose income later falls, their rent burden is supposed to be readjusted to a percentage of their actual income, not the flat dollar amount previously paid.

Targeting of Admissions for Project-Based
Section 8 Properties

Section 513 of the Act¹⁴ amends the provisions of Section 16 of the United States Housing Act that govern the targeting of new admissions for project-based Section 8 properties. This section first restates the longstanding general rule that, for properties that were on line prior to October 1, 1981, no more than 25 of the units may be leased to low-income families who are not very low-income families. This means that at least 75 percent of new admissions must be reserved for very low-income families, that is, families with incomes less than 50 percent of area median. For units that first became available after October 1, 1981, the very low-income reservation increases to 85 percent of new admissions. In addition, the Act contains further targeting rules, apparently similar to those applicable to public housing.¹⁵ It appears that Congress will also apply the requirement that 40 percent of all units that become available in any fiscal year must be leased to families with initial incomes below 30 percent of area median. As for public housing, this further targeting figure represents a potentially substantial reduction in occupancy by such very, very low-income families (who currently occupy about 75 percent of the public housing units).

Section 513 further largely maintains the existing "anti-skipping" language of current law, which protects eligible applicants from being bypassed in the Section 8 project-based admissions process in favor of higher-income people who applied later. However, in a major change to existing law, the Act adds that these targeting and anti-skipping provisions shall not prevent owners from establishing a preference for applicants with one employed family member. Since other federal preferences have been repealed for both public and assisted housing, careful implementation of this provision will be imperative to ensure that families and elderly people receiving public assistance continue to have access to these project-based units. A major question will be the extent, if any, of an owner's authority to adopt other preferences — a question unaddressed by statutes now silent in the wake of repeals elsewhere in the Act — procedural safeguards, and the interrelationship of any preferences with the targeting and anti-skipping protections of the law. Given the historical difficulty of obtaining information sufficient to monitor and oversee these policies and decisions of private owners, a stronger HUD role in rulemaking and monitoring will be essential to protect against arbitrary abuses. The Fair Housing implications of any employment preferences will have to be closely evaluated. As these changes to the admissions process are effective upon enactment, swift action will be essential to clarify the situation for applicants and owners alike.

¹  The "Housing Quality and Work Responsibility Act" ("the Act"), is Title V of H.R. 4194, Department of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act, 1999, Pub. L. No. 105-276 (signed by the President on October 21, 1998). The Conference Report is H.R. REP. NO. 769, 105^th Cong., 2d Sess., 144 CONG. REC. H9359 (Oct. 5, 1998).
²  144 CONG. REC. H9366 (Oct. 5, 1998).
³  Id. at H9366-67.
⁴  Id. at H9398.
⁵  Pub. L. No. 105-18, § 10002 (1997), amending 42 U.S.C. § 1437f(c)(9).
⁶  Pub. L. No. 105-65, § 514(d) (1997).
⁷  These repealed provisions were formerly set forth at Sections 8(c)(8) (rent increase notice), 8(c)(9) (HUD review and findings) and 8(c)(10) (HUD duty to adjust rents within limits) of the United States Housing Act of 1937, codified at 42 U.S.C.A. §§1437f(c)(8), (9) and (10) (West Supp. 1998).
⁸  Pub. L. No. 105-65, § 524(a)(1) (1997).
⁹  144 CONG. REC. H9376 (Oct. 5, 1998).
¹⁰  Id. at H9412.
¹¹  Section 202 of the Housing and Community Development Amendments of 1978, codified at 12 U.S.C. § 1715z-1b.
¹²  144 CONG. REC. H9361 (Oct. 5, 1998).
¹³  Id.
¹⁴  Id. at H9381, revising Section 16(c) of the United States Housing Act, to be codified at 42 U.S.C. § 1437n(c).
¹⁵  "Apparently" because the end of the sentence is dropped from the Congressional Record version of the bill. Reportedly this will be corrected in the overall omnibus budget bill being developed before Congress adjourns in late October.