National Housing Law Project Housing Law Bulletin

Local awareness, advocacy and collaboration will be essential to success. For starters, we need (1) the money to run the program, (2) HUD and other responsible public agencies to issue responsive rules, plans and policies, and (3) good decisions from the new administrators.

1. Funding

Objective: To convince Congress to provide adequate annual appropriations for growing Section 8 renewal costs.

The new program is just a framework, primarily procedural, with some policy choices to fit within that structure. For the majority of situations where expiring contracts will be renewed with project-based assistance, the Section 8 program remains intact, subject to existing rules or future congressional amendments. However, the new program could not and did not resolve the perennial key issue of how much money will be provided to renew expiring contracts and to run the program. Although last year’s Balanced Budget Agreement committed to providing full funding for all expiring Section 8 contracts from Fiscal Years 1998 through 2002, there is no assurance that the predicted additional outlays will actually prove sufficient. Nor is there any guarantee that, despite providing a substantial increase in budget authority for this purpose for FY 1998, Congress will actually provide enough budget authority to enable those outlays. This is because the required budget authority continues to escalate every year throughout this period as the number of expiring contracts mount from the combined effect of scheduled initial expirations and one-year renewals.²

Most immediately, since the appropriations challenge arises annually, the next step must be to enforce the promise of the budget agreement by securing full funding for FY 1999 renewals, approximately $13 billion (HUD’s estimate from the FY 1998 Budget) in budget authority. Two things must happen here:

(1) First, the Administration’s FY 1999 budget request must be adequate for full renewals. HUD has to request these funds from the Office of Management and Budget (OMB), and OMB has to agree to this level through the "passback" and subsequent negotiation process. Democratic legislators can be especially important here, especially if OMB proves reluctant to approve adequate funding in the budget request, usually released in early February.

(2) Second, Congress’ budget resolutions and appropriations bills must follow suit and actually provide the funding. Of course, Republican legislators on the Budget and Appropriations Committees are especially influential here.

2. Program Details

Objective: To ensure that HUD adopts responsive and workable implementing regulations to fill in gaps, and provides adequate staffing for the program.

The statute does not resolve all of the major policy and procedural issues raised by an undertaking of this magnitude. On many issues, discretion is left to HUD or possibly even to the new administrator, the "Participating Administrative Entity" (PAE). In some cases, HUD’s rules may determine these policies or provide the framework for PAE decisions. In other cases, policies may be totally left to the PAE’s determination. In places where the prospective PAE has no history of adopting the kinds of policies or processes sought by affected constituencies, or has made no commitment to do so, then focusing efforts on HUD’s rulemaking concerning several central issues should be especially important to establish operating ground rules for many PAEs. Those issues where HUD rules could be useful in guiding PAEs could include, for example, the following:

(1) PAE selection criteria and process;

(2) Tenant and community participation in PAE selection and overall PAE plans ("portfolio restructuring agreements") and project-specific restructuring planning;

(3) Solutions for troubled properties, including transfers to tenant-endorsed nonprofits;

(4) "Safe harbor" guidelines for project-based renewals;³

(5) HUD discretion re increases in Section 8 rents to market rates for renewals of below-market properties; and

(6) Clarification that enhanced vouchers are available when owners "opt-out" of the program at contract expiration.

This discretion may be linked to specific housing policy objectives, such as transfers to tenant-endorsed nonprofits with long-term affordability commitments, preservation of affordable housing in markets where vouchers do not work well, fair housing policies, or protection of certain targeted populations.

Also important will be Secretary Cuomo’s choice for the Director for the new Office of Multifamily Assisted Housing Restructuring ("OMAHR"), how HUD staffs OMAHR and, to the extent that duties remain elsewhere, the Office of Housing.

3. Engaging the New Administrators

Objectives: To ensure that qualified state or local public agencies step forward to assume restructuring and oversight responsibilities, to develop responsive plans and policies, and to make sound project-specific decisions.

This group of activities has a local focus. It is potentially an area where well organized advocates can have the greatest impact, with much to win and potentially a lot to lose. This work needs to begin now, since many of the preliminary decisions made by state and local actors can be taking place at any time during this period prior to HUD’s rulemaking and, once made, they will prove more difficult to reverse.

Here are some places to get started:

(1) Identify and analyze the affected properties. HUD’s data can be obtained from HUD’s Website at http://www.hud.gov/fha/mfh/mfhsec8.html.⁴ This data provides some vital basic information about the inventory, such as property and owner name, address, number of units, type of financing, expiration dates, comparison of Section 8 contract rents to Fair Market Rents.

(2) Analyze this data for risks (e.g., potential disqualifications, opt-outs, high rehabilitation costs, restructuring candidates, PAE voucher conversion risks).

Critical for this phase of the analysis will be rough market rent evaluations for each property, since the primary factor influencing the property’s future will be the owner’s economic motivation which, in turn, is usually driven by a comparison of available returns by renewing or restructuring under the federal rules versus declining a renewal and facing the risks of market operation. PHAs, which perform "reasonable rent" determinations for their tenant-based subsidy programs, may have useful information to contribute on this task, as may local government housing or planning departments, or local real estate boards or apartment associations. Graduate students in local university planning programs may supply necessary expertise as well. Also important will be evaluations of project conditions and estimates of rehabilitation costs, as well as HUD asset management information (from the project servicing file in the local HUD office).

(3) Educate, identify and enlist potential allies. Talking to some important local government officials or community groups may demonstrate that few know of these challenges or have thought about how best to move forward. If you are not going to do this, you need to make sure that someone else whom you trust is ready to undertake the work. Education of local government and community organizations concerned with protecting and improving the affordable housing stock is usually an essential first step that has yet to be taken.

(4) Identify and engage potential state and local public agency PAEs on their application. It is far from given that public agencies around the country will tackle this challenge. Which agencies are interested? What are their motivations? What are their reservations? Does administrative capacity exist or can it be developed to ensure statewide coverage? What is the local agency interest? What are the prospective PAEs’ decision-making processes and timeframes? Over the past few years, very few state agencies⁵ have successfully concluded negotiations with HUD to assume the designee’s role under the FY 1997 Reengineering Demonstration program. Many others (about 20) have prepared management plans but have not yet concluded final agreements, primarily because of contracting issues. These agencies are most likely to be interested in assuming the PAE role, and moving ahead quickly. While these agencies may intend to fill the void, momentum may prove an obstacle to their enactment of a responsive program if it is absent from their current designee plan.

Advocates need to make sure that a competent state or local public agency steps forward to seek the PAE role. If none applies, then whatever benefits of local control exist will be lost, along with the opportunity for constructing improved public accountability, since the alternative will usually be some partnership between HUD and the private sector, hardly an inspiring combination for responsiveness to tenant and community interests.

(5) Influence the PAE’s policies and practices on key issues. Of course, it is not just ensuring a public agency application for the PAE role that is important. More vital is the content of the PAE application, and the commitments that prospective PAEs have made or will make to ensure that their policy and program will be superior to HUD’s past performance and that they will be adequate for the task ahead.

Every PAE’s program should address several important issues: (a) subsidy format after restructuring (the project-based versus tenant-based decision for the properties that are not in tight markets or do not serve the elderly or disabled), (b) rehabilitation planning, and (c) the degree of tenant and community involvement in the process. Other important PAE policies will include disqualification standards for "bad owners" and "bad properties," appraisal and underwriting issues, management assessments, use restrictions, and future monitoring and oversight of project performance.

Subsequently, as the program becomes operational, the PAE’s actual implementation of these policies in both the restructuring process and the future property and contract oversight process will also be critical, since many of HUD’s problems can arguably be traced to its bilateral regulatory relationships with owners that have historically excluded tenant and local community input. Tenants especially must have the opportunity for a more central role in the ongoing regulatory process, including involvement in periodic project and management reviews. To resolve problems promptly, they also need access to more responsive regulators — the PAE staff that performs oversight functions.

Obtaining a responsive program presents an enormous challenge. Most PAEs lack such experience with their existing programs, which rarely involve close oversight. Section 8 often serves people with much lower incomes than other PAE programs, and includes much more regulatory compliance because of the higher level of public investment. Encouraging a better program will be especially important over time: if this transfer of administrative responsibility succeeds, Congress may next devolve more responsibility to local entities for the basic rules of the Section 8 program as a whole.

(6) Identify state or local resources or create such resources or policies through legislation for meeting priorities where federal resources or policies are insufficient.

There may well be areas where federal funds are insufficient for the needs of the properties or the program. State and local resources may be needed to meet these needs. Potential areas where federal funds may run short include: (1) education and capacity-building funds for tenants, nonprofits and other community organizations, (2) subsidy or capital funds to preserve developments that currently carry Section 8 subsidies below market value and that would otherwise exit the program ("opt-outs"), (3) rehabilitation funds, and (4) funds for other technical assistance or predevelopment needs that are part of the program or important to permit transfers of developments where owners want to sell.

Similarly, there may be situations where state or local legislatures decide to use their programs or policies to fill in the gaps in the federal or PAE schemes, or to use their police powers to regulate the conduct of housing providers to promote continued affordability.

Other Needed Federal Actions from Congress, the IRS, and HUD

First, in the short run, the restructuring program will not succeed unless HUD and Congress secure from the IRS a clear tax opinion concerning the viability of the new program’s debt bifurcation approach for avoiding a taxable event. Without such clarity, owners will delay proactive restructuring and either accept unwise reductions in rent levels or quickly default and await foreclosure.

Second, eventually much of the privately owned assisted inventory will suffer from inadequate recapitalization resources if subsidy funds shrink and owners lack motivations to invest. The tax problems of initially shelter- motivated owners grow over time, so properties cannot expect significant investments from that source. The only exception will be those properties with significant real equity value sufficient to mitigate tax liabilities. To reposition the inventory for longer term viability, Congress must pass exit tax relief for owners that agree to transfer properties to nonprofit, community-based or public organizations for preservation. Since this will be a big leap from the policies of recent Congresses, this is a long-term project and advocacy work must begin now.

Third, there will be many mistakes, bugs and ambiguities in the renewal and restructuring program that require federal legislative amendment.

Fourth, Congress is poised to take dramatic steps to reduce the "targeting" of Section 8 assistance. Both pending "public housing" bills (S.462 and H.R.2) would substantially reduce targeting requirements for both public housing and project-based Section 8 assistance, permitting about half of the units currently occupied by families below 30 percent of area median income (both working poor and public assistance recipients)⁶ to be rented on turnover to higher income families. Of course, for both programs, these diversions would tend to remove the best housing from occupancy by the lowest income tenants, since the better stock is the most attractive to higher income tenants. For the project-based Section 8 units, this diversion would likely have little public oversight.

Fifth, also of critical importance will be strategies for maintaining the older assisted stock without placing the economic burden on tenants. Much of the stock that will be renewed but that is ineligible for restructuring — with slightly below-market rents, but not enough to justify conversion — will require funding and policies for rehabilitation. The renewal and restructuring program just enacted contains neither for this large segment of the inventory.

These tasks are formidable, but essential for moving forward within the framework that has been created. They will require better education of affected constituencies, improved organization, collaboration and coordination. Pick several and get started. Together, we will help ensure the preservation of a significant portion of this nation’s affordable housing.

1. See The New Section 8 Renewal and Restructuring Program: An In-Depth Review, 27 HOUS. L. BULL. 175 (Nov. 1997).
2. See Section 8 Expirations: Housing Resource Up for Grabs, 27 HOUS. L. BULL. 97 (July 1997).
3. The statute guarantees a project-based renewal for housing located in tight markets, predominantly occupied by elderly or disabled tenants, and nonprofit cooperatives, but these terms require further definition.
4. See information box, HUD Provides Improved Data on Section 8 Projects Via the Internet, elsewhere in this issue.
5. Only three (Ohio, Colorado and New Mexico) as of November 1, 1997.
6. Currently, HUD’s data show that approximately 75 percent of public housing units are occupied by families with incomes less than 30 percent of area median, and the pending legislation would reduce this to a minimum of 30 to 40 percent of the units.