National Housing Law Project Housing Law Bulletin

In November, HUD issued a new Notice¹ providing administrative procedures governing renewals of Fiscal Year 1998 expiring project-based contracts not subject to the FY 1998 expanded demonstration program. This Notice implements the authority granted by Section 522(b) of the FY 1998 Appropriations Act.² In effect, that law carries forward last year’s requirement that, upon owner request, HUD renew certain expiring contracts at current rent levels (generally capped at 120 percent of the area Fair Market Rent (FMR)), and that it renew others regardless of rent level.³

One-Year, 120-Percent-of-FMR Limits on Renewals

When owners request a renewal,⁴ the FY 1997 and 1998 Appropriations Acts require HUD to renew many expiring project-based contracts of multifamily properties for no more than one year at rent levels in effect at expiration, subject in most cases to the 120-percent-of-FMR limit. These renewals may include projects with current rents below the 120-percent level, as well as others with higher rents whose owners seek to take a rent reduction and operate at the 120-percent level by reducing profits or cutting certain operating expenses or reserve payments. Owners renewing under this authority will receive no rent adjustment during the term of the renewed contract.

Term of renewal contracts. Generally, contracts will be renewed for a one-year term. HUD Notice H 97-66 indicates that owners seeking participation in the demonstration program may seek a six-month renewal contract, during which they will negotiate with HUD or a designee the terms of the mortgage restructuring, subsidy reduction and renewal transaction.⁵ Other owners could potentially still negotiate a renewal term of shorter than one year if they wished to keep their conversion options open, and if HUD is willing. Where the owner does not wish to renew but has failed to provide tenants with the full required (now) six-month notice of contract expiration,⁶ HUD has restated elsewhere its prior policy of requiring a renewal term of whatever length is necessary to enable to owner to fulfill the notice requirement, unless the owner chooses to keep the tenant contributions at the Section 8 levels without any assistance payments from HUD.⁷

Exemptions. The Appropriations Acts also exempt certain categories of properties from the 120-percent limit, including those that have financing provided or insured by a state or local public agency, those with HUD Section 202 loans, and those with FmHA/RHS Section 515 (rural housing) loans. These contracts will be renewed on owner request for no more than one year at current rent levels, also without rent adjustment during the renewal term.

A new exemption to the 120-percent cap added by the FY 1998 law is for those properties with current Section 8 rents in excess of 100 percent of FMR but below "comparable [market] rents."⁸ In this case, owners seeking to renew at more than the general 120-percent cap must perform a comparability analysis (via an independent appraiser). (An owner could also "opt-out" by declining to seek a renewal). If the current Section 8 rents are below comparables, then the contract may be renewed at existing rents, irrespective of the 120-percent cap. If the current Section 8 rents are above comparables, then the rents must be reduced to 120 percent of FMR. Alternatively, in this latter case, the owner may elect to enter the restructuring demonstration program continued by the same law (usually where a renewal at 120 percent of FMR would not cover current debt service and operations).

Another new exemption from the 120-percent renewal cap is for those expiring properties provided Section 8 under the McKinney Homeless Assistance Act, Section 8 for Single Room Occupancy program.

Owner Option re Applicable Renewal Law

HUD Notice H 97-66 also reiterates HUD’s prior policy that owners of properties with expiring use contracts and with rents less than 120 percent of FMR may elect a renewal under either the Appropriations Acts⁹ or Section 405(a) of the 1996 Continuing Resolution (a "permanent law").¹⁰ As with renewals under the Appropriations Acts, renewals under Section 405 are usually capped at 120 percent of FMR. However, HUD states that owners may receive budget-based rent increases of up to 5 percent (within the cap) by using Section 405, rather than the rent freeze in the FY 1998 law (§ 522(b)) which adopted FY 1997’s Section 211 "freeze."

Further, Section 405 renewals cover only units occupied at expiration. Where Section 236 HUD-approved Basic Rent levels exceed the 120-percent cap, Section 8 Loan Management Set-Aside contracts are to be renewed at those higher Basic Rent levels.¹¹ There is a significant question about the legality of HUD’s attempt to impose a 5-percent rent-increase limit on Section 236 properties requiring renewal with budget-based rent increases more than that amount, since Section 405 contains no such cap.

Notice to Tenants and HUD of Expiration or Nonrenewal

The comprehensive program renewal and restructuring program for FY 1999¹² contains a provision that requires HUD to develop notice procedures¹³ for tenants and owners concerning expiration dates for any projects eligible for restructuring. During FY 1998, presumably, owners who want to renew their Section 8 contract or who want to opt out of the program must continue to provide HUD and tenants with at least six months’ notice prior to expiration.¹⁴ In addition, under current law, owners who do not intend to renew their contract and seek to increase the rents must provide tenants with a notice of any resulting rent increase at least 90 days prior to contract expiration.¹⁵ This 90-day notice should trigger HUD’s processing of the tenant-based replacement housing assistance. With respect to some developments with HUD-subsidized mortgages, prepayment terminates only the Regulatory Agreement, but does not permit the owner an early exit from the unexpired term of any project-based Section 8 contract.¹⁶

Compliance with Housing Quality Standards

HUD’s new Notice H 97-66 does not address compliance with Housing Quality Standards, presumably because it was covered by HUD Notice H 97-50 (Aug. 8, 1997).

Replacement Subsidies upon Proper Termination

Notice H 97-66 does not address situations where an owner has properly terminated the Section 8 contract. Presumably, HUD will follow the provisions of its FY 1997 Notice (H 96-89), requiring it to provide eligible tenants with one-year tenant-based assistance as of the contract’s expiration date if appropriated funds are available.¹⁷

Moderate Rehabilitation Contract Expirations

During FY 1998, most Moderate Rehabilitation contracts are now renewable for one-year terms, subject to the same 120-percent-of-FMR or current rent limits. HUD recently issued a clarification of its earlier projected voucher-conversion policy.¹⁸

Minimum Rents and Other Provisions

Notice H 97-66 implements the continued authority provided HUD by the FY 1998 Appropriations Act to require minimum rents of up to $50 monthly. In this new Notice, HUD has elected to continue its prior policy set forth in Notice H 96-89¹⁹ to set the minimum rent at $25 for all project-based Section 8 recipients. That Notice specifies certain exceptions, including families working for at least 20 hours per week with an adjusted income of less than $75 monthly; any households receiving an allowance for handicapped or disabled members; or elderly, disabled or handicapped families with monthly incomes of less than $75. Notice H 97-66 also continues the suspension of federal preferences.²⁰

1. HUD Notice H 97-66, "FY 1998 HUD Appropriations Act" (Nov. 12, 1997, expires Nov. 30, 1998). This Notice reinstates last year’s Notice on this issue (H 96-89, "FY 1997 Appropriations Act" (Oct. 15, 1996, expired Oct. 31, 1997)), and provides additional guidance regarding some changes required by the FY 1998 law. (HUD has also issued other clarifications to the FY 1997 Notice. See Memorandum for All Housing Directors from Nicolas P. Retsinas re Clarification of Procedures for Project-Based Section 8 Contracts Expiring in Fiscal Year 1997 (Nov. 1, 1996) (hereafter, "Retsinas Nov. 1 memo"); HUD Notice H 96-97, "Supplement to Notice H 96-89" (Nov. 13, 1996, expired Nov. 30, 1997). See also HUD Notice H 96-74 (Aug. 28, 1996). The Retsinas Nov. 1 memo reviews the mechanics for applying the 120-percent cap to a project with different mixes of unit sizes and rent levels.) For more detail on the FY 1997 Notice (96-89), see HUD Notice Provides Limited Guidance on Section 8 Contract Renewals and Opt-Outs, 27 HOUS. L. BULL. 59 (Apr. 1997).
2. Pub. L. No. 105-65, tit. V, § 522(b), 111 Stat. 1344 (Oct. 27, 1997).
3. Section 211 of the Fiscal Year 1997 Appropriations Act, Pub. L. No. 104-204, § 211, 110 Stat. 2874 (Sept. 26, 1996). See also Another One-Year Reprieve for Most Expiring Section 8 Housing, 26 HOUS. L. BULL. 133 (Oct. 1997); HUD Issues Section 8 Reengineering Demonstration Guidelines, 27 HOUS. L. BULL. 26 (Feb. 1997), for more information on HUD-insured projects with Section 8 contract rents over 120 percent of FMR whose owners elect restructuring prior to renewal.
4. Obviously, given that renewal is at the option of the owner, those properties with current Section 8 rents significantly below market will be at greatest risk of conversion (whose owners "opt-out" of the program). For other properties with rents near market, or for exception properties with rents above market, renewals at current rents may be perfectly adequate from the owner’s perspective, and those owners will use the renewal policy set forth in this Notice.
5. See HUD Issues Section 8 Reengineering Demonstration Guidelines, 27 HOUS. L. BULL. 26 (Feb. 1997).
6. 42 U.S.C.A. § 1437f(c)(9) (West Supp. 1997), as amended by Pub. L. No. 105-18, § 10002 (June 12, 1997).
7. HUD Notice H 97-54 (Sept. 3, 1997).
8. Pub. L. No. 105-65, § 523(e). Apparently, properties with current Section 8 rents under 100 percent of FMR, but with higher comparable rents (regardless of the 120-percent mark), are not protected for FY 1998 by this provision. Properties with current rents between 100 and 120 percent of FMR, but with higher comparables, have the current rent renewal option. In FY 1999, Section 524(a)(1) gives HUD the discretion to increase rents on any expiring contract to market value.
9. See notes 2 and 3, supra.
10. Pub. L. No. 104-99, 110 Stat. 26 (Jan. 26, 1996).
11. HUD Notice H 97-66 continues the policy originally contained in HUD Notice H-97-11 "Supplemental Guidance for Section 236 Projects" (Feb. 24, 1997).
12. Pub. L. No. 105-65, tit. V, supra note 2, reviewed in The New Section 8 Renewal and Restructuring Program: An In-Depth Review, 27 HOUS. L. BULL. 175 (Nov. 1997).
13. Pub. L. No. 105-65, supra note 2, § 514(b) (HUD duty to develop notice procedures for "any eligible" project). For FY 1999, an owner of any property with an expiring contract (not just those "eligible" for restructuring) who does not agree to extend the contract is also specifically required to give HUD and the tenants at least 12 months’ written notice of the intended nonrenewal. Id. § 514(d) (projects with "expiring rental assistance contracts").
14. Pub. L. No. 105-18, § 10002 (June 12, 1997). HUD Notice H 97-54 (Sept. 3, 1997) provides a new sample notification letter for owners to use, but it fails to resolve much of the confusion surrounding expirations and renewals.
15. 42 U.S.C.A. § 1437f(c)(8) (West Supp. 1997).
16. HUD Notice H 97-54 (Sept. 3, 1997).
17. To date, HUD has never failed to obtain the required amount of funds from Congress to renew contracts whose owners wish to do so or to subsidize families whose owners opt out of the Section 8 program. For background, see Section 8 Renewals Pose Extraordinary FY 1998 Budget Challenge, 26 HOUS. L. BULL. 167 (Dec. 1996).
18. HUD Notice PIH 97-58 (Nov. 21, 1997), superseding Notice PIH 97-46 (Sept. 4, 1997).
19. Supra note 1.
20. The Retsinas Nov. 1, 1996, memo also took the position that local preferences were suspended as well, but HUD’s position for FY 1998 remains unclear.