National Housing Law Project Housing Law Bulletin

The current interim rule is published for effect October 22, 1997, and considers public comments received by HUD on the September 1996 Notice and is codified as new Part 971 of 24 C.F.R.³ HUD received five comments on its September 1996 Notice. The newly published interim rule responds to concerns raised by those commenters, including several raised by NHLP.⁴ Despite the immediate effectiveness of the interim rule, the Department solicits public comment by November 21, 1997.

1. Cost comparison unfairly favors vouchers.

The general requirements for identification of projects are that they have 300 or more units and a vacancy rate of 10 percent or more for units not in funded modernization, and that the cost of continued operation as public housing must exceed the cost of conversion to vouchers.

NHLP had suggested that the methodology for comparing the costs of continuing a project as public housing rather than "vouchering" it out unfairly favors conversion, particularly in the Stage 1 identification of projects. We had criticized the cost-comparison methodology because the Notice required comparing the costs of preserving all the units in a public housing project with that for providing vouchers only to tenants in the occupied units. Moreover, in calculating voucher costs, HUD relies on current Fair Market Rents (FMRs) over the 20-year comparison period, without adjusting for inflation. Finally, HUD double counts the capital costs for public housing. Modernization costs are counted at the beginning of the 20-year comparison figure. In addition, the costs of saving for a second modernization at the end of 20 years are counted.

The interim rule drops the initial cost test which looked at partially occupied developments and replaced it with consideration of the cost of a revitalized fully occupied development.⁵ The interim Notice provides that the cost comparison must be based on "appropriate indicators of cost," including "estimated operating costs, modernization costs and accrual needs . . . used to develop a per unit monthly cost of continuing the development as public housing."⁶ The Department has determined that current operating costs (which may be for a partially occupied development), while no longer an independent indicator of cost, will provide a "standard" for measuring the feasibility of projected operating costs for the revitalized development.

The interim rule makes other changes related to how the costs for revitalized units are to be calculated. In response to commenters who argued that higher modernization expenditures at the beginning of an accrual cycle should lower accrual costs into the future, HUD altered the accrual model for the revitalization stage to reduce from the total development costs (TDC) half the per-unit cost of modernization.⁷

In addition, the interim rule includes an amount for demolition, site preparation and relocation as a cost of Section 8 rental assistance.⁸ Actual costs for demolition and relocation are included and capped at a maximum of "10 percent of TDC for a two-bedroom walk-up in the area." HUD projects that this cap exceeds the typical per-unit cost of HOPE VI demolitions.

To meet the argument of commenters who suggest that major revitalization will result in a useful life longer than the 20 years provided in the viability test, the interim rule adopts a 30-year period, but only when the revitalization is commensurate to new construction.⁹
 
2. Tenant consultation should be guaranteed at each stage of the conversion process.
 
Although Section 202 requires that PHAs consult with residents in the mandatory conversion process, last year’s Notice merely recited the statutory requirement and required a record of consultation be a part of the conversion plan. NHLP recommended that affected residents be notified beginning with the Stage 1 identification of developments, that they be consulted at Stage 2 when long-term viability assessments are made, and that consultation continue through a Stage 3 determination whether to convert.

The interim rule sets out specific requirements for meeting the tenant consultation requirements. These include that the PHA timely provide resident groups and tenant councils with submissions made to HUD in identifying projects in the first stage of the conversion process. In addition, the PHA is required to hold a meeting with residents to explain the mandatory conversion requirements and to provide residents an outline of their submissions in support of the required vacancy rate, cost determination and long-term viability. The interim rule mandates a "reasonable comment period for residents" and requires that each PHA provide a summary of resident comments to HUD. These steps are required not only at Stage 2, but again when the actual conversion plan is in preparation.¹⁰

3. The Notice is biased in favor of conversion.

The Notice created extrastatutory requirements that projects be no more dense than similar housing in the area, not be overly concentrated with very low-income families, and not have other site conditions that prevent its maintenance as public housing. NHLP argued that these requirements exceed the statutory mandate for long-term viability. In fact, NHLP had commented that the Notice created a presumption of distress for developments entering Stage 2, at which long-term viability is assessed, without adequate guidance.

The interim rule response to comments makes clear the Department’s belief that "density reduction" and "achievement of a broad range of household income" are valid indicators of long-term viability. However, the interim rule clarifies density requirements so that PHAs need not demonstrate reduced density, but only that the proposed density for the revitalized development is suitable for the property and the site. In addition, the interim rule rejects the previous requirement for achievement of income mix of residents at 30 to 50 percent of area median income in favor of a standard requiring that the revitalized development have the capacity to attract a "significant mix of households with at least one full-time worker."¹¹

4. Tenant relocation planning is inadequate.

The Notice failed to prescribe legal requirements for PHAs displacing residents, including failure to provide Uniform Relocation Act guarantees. In addition, it fails to require that the conversion plan include demographic information about income, race and disability status, among other information, that will facilitate relocation. No requirement is included that the plan include an assessment of the capacity of the relevant market to absorb vouchers or the adequacy of such vouchers to cover rents in that particular market.

The interim rule cross-references the displacement and relocation provisions of 24 C.F.R. § 970.5 which includes the applicability of the Uniform Relocation Act.¹² As with the Notice, under the interim rule Section 18 of the United States Housing Act does not apply to demolitions of developments subject to a conversion plan, but it does apply to the sale of developments or their sites.¹³

5. What happens to buildings after a decision to convert?

Under both the Notice and interim rule, no impediments exist to vacant buildings remaining vacant and further blighting often already fragile neighborhoods. The Notice failed to spell out what must happen to a building after conversion, beyond establishing that such buildings will no longer be funded under the Annual Contributions Contract and will be removed from the PHA’s inventory. The interim rule continues to omit any guidance for PHAs regarding use of converted buildings in the absence of federal operating subsidies and rules.

The interim rule continues to be silent on the consequences to specific developments of a decision to convert. For example, will they be allowed to sit vacant? May they be converted to uses other than low-income housing?
 
6. The statutory requirement to convert public housing units to vouchers is disregarded.
 
The process set out in the Notice would result in the elimination of some public housing developments without their equivalent replacement with vouchers. Because of the reductions in operating subsidies, present and future modernization funds and concomitant reductions in appropriations, and because of the elimination of converted developments from the public housing stock, there will be a significant reduction in public housing funds without a commensurate increase in funding for tenant-based assistance. This is true despite the fact that Congress intended that families displaced by conversion be relocated with vouchers if that is their choice.

HUD responds that sufficient FY 1997 appropriations are available to relocate families displaced as a result of mandatory conversion, and that the Department has requested sufficient funding for FY 1998.¹⁴ The Department believes that the staggered implementation period (up to five years) for a conversion plan will facilitate local solutions to the problem of market absorption and the need for hard units and additional project-based housing in some communities.

7. Conversion plan must be consistent with the CHAS.

The interim rule continues the vague requirement that the conversion plan be approved by local government as not inconsistent with the Consolidated Plan.¹⁵ NHLP was among commenters requesting the more stringent mandate of a local government finding that removal of the units from the PHA’s inventory be consistent with the Comprehensive Housing Affordability Strategy (CHAS) and that steps toward conversion by HUD and the PHA may not proceed in the absence of local approval. Pending legislation would loosen targeting and reduce the requirements that PHAs serve poorer people. In fact, even in the absence of legislation, more and more control has been surrendered to PHAs. In the face of these changes, the CHAS takes on added importance as a tool to ensure that the needs of extremely low- and very low-income families are assessed and addressed as PHAs move forward with their conversion plans.

Conclusion

As the arsenal of tools grows to aid PHAs in divesting themselves of hard units, strictest attention must be paid to assure that conversions are subjected to rigorous standards. Without such monitoring, thousands of viable affordable units could be lost to families most in need.

1. HUD interim rule, 62 Fed. Reg. 49,571 (Sept. 22, 1997), "Assessment of the Reasonable Revitalization Potential of Certain Public Housing Required by Law." For additional information related to Section 202, see HUD Issues Implementing Notice for Public Housing Conversion — Public Review and Comment Will Be Crucial, 26 HOUS. L. BULL. 137 (Oct. 1996); HUD Issues FY 1997 Guidance for Preservation and Section 8 Renewals, 27 HOUS. L. BULL. 11 (Jan. 1997).
2. Section 202 of the Omnibus Consolidated Rescissions and Appropriations Act of 1996, Pub. L. No. 104-134 (Apr. 26, 1996) (mandatory conversion of certain public housing units); Section 202 of the Balanced Budget Downpayment Act, Pub. L. No. 104-99 (Jan. 25, 1996) (PHAs’ obligation to identify certain distressed public housing developments with costs greater than the costs of converting to Section 8 Rental Assistance and which cannot be reasonably revitalized).
3. NHLP submitted comments to HUD by letter dated September 25, 1996. Those comments are on file at NHLP. This article points out how (if at all) HUD addressed NHLP’s seven enumerated comments.
4. Interim Rule, § IV, Discussion of Public Comments on the September 26, 1996, Federal Register Notice, 62 Fed. Reg. at 49,575.
5. 62 Fed. Reg. at 49,574.
6. Id. at 49,576, § 971.3(a)(4)(ii).
7. Id. at 49,579, Appendix I to Part 971: Methodology of Comparing Cost of Public Housing with Cost of Tenant-Based Assistance," § C.
8. Id. Appendix II.
9. Id. at 49,574; see also id. at 49,576, § 971.3(d).
10. 62 Fed. Reg. at 49,577, §§ 971.9(a)-(c).
11. 62 Fed. Reg. at 49,574-5 and 49,577, §§ 971.5(b) and (c).
12. 62 Fed. Reg. at 49,573, § 971.7(b)(7); id. at 49,577.
13. Id. § 971.7(c).
14. Congress appropriated $343 million in relocation assistance for FY 1998, despite the Administration’s request of $594 million. These vouchers must be used for purposes beyond mandatory conversion. See House and Senate Settle on HUD Funding for FY 1998, 27 HOUS. L. BULL. 159 (Oct. 1997) (chart).
15. Id. at 49,577, § 971.9(d).