National Housing Law Project Housing Law Bulletin

In October, Congress’ enactment of new legislation to address expiring Section 8 contracts¹ has created new opportunities and challenges for preserving and improving a substantial part of the enormous project-based Section 8 housing stock. One of the most significant changes wrought by the new law is the potential transfer of administrative and oversight responsibilities for the "restructured" stock² to state and local housing agencies, or to partnerships involving public agencies, once the new program formally commences operation on October 1, 1998.

This article reviews some of the activities advocates must pursue now at the state and local level to create a better housing program.

Even though the statute leaves many important questions unresolved, which hopefully will be addressed through HUD rulemaking in the next few months, it is certain that in many states, state housing agencies are actively considering whether to apply to assume these administrative and oversight duties from HUD, and to determine the general shape of their program. Where state housing agencies are not doing this, then advocates should be evaluating a strategy for encouraging them to do so, since the absence of a qualified state or local agency application may result in a partnership between HUD and for-profit entities to perform these functions, an uncertain prospect at best. Regardless of the specifics of HUD’s rules, these activities will be taking place in many jurisdictions during the same time period. Advocates’ failure to participate in them will rarely ensure a framework for a responsive affordable housing program that addresses tenant and community needs.

Work at the state level during this period involves the following challenges:

As the state and local work gets underway, advocates will need to bring themselves together, either on an ad hoc or more formal basis. Existing state or local housing and homeless coalitions may fit the need. Other times, forming new alliances may be necessary, such as with tenant leaders and tenant organizations, nonprofit housing sponsors and CDC networks, community-based social service providers, local government officials and staff, the academic community, and other housing advocates. These activists will play an essential role in raising awareness of the importance of the Section 8 program in meeting community housing needs, in addressing the challenges presented by the restructuring program, and in securing adequate resources in the annual federal budget battle, even just to renew all expiring contracts and units.

Another essential component of moving forward is getting a more accurate picture of what properties are affected by restructuring or by other risks.³ HUD has made great progress in improving its data on expiring Section 8 properties.⁴ This data provides some vital basic information about the inventory, such as property and owner name, address, number of units, financing type, expiration dates, and comparison of Section 8 contract rents to Fair Market Rents (FMRs).

In determining which properties in a particular jurisdiction will be eligible for restructuring, and when, the key is to figure out which HUD-insured or HUD-held properties have Section 8 contract rents in excess of "true market." From the HUD data, you can first examine properties with Section 8 rents more than 100 percent of FMR, or some lower percentage (e.g., 90 percent) if that is a better indicator of true market values. This will give you a rough idea of properties likely to be affected by restructuring, although the final determination will depend upon "true market" values. The data also requires analysis for other risks, such as potential disqualifications or owner "opt-outs." Sorting the data by expiration date will provide a better picture of the actual flow of properties over the next few years — important for developing a PAE staffing plan with the requisite capacity to handle the load.

Ultimately, rough market rent evaluations for each property will be essential, 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 HUD or local code enforcement evaluations of project conditions and estimates of rehabilitation costs, as well as HUD asset management information (from the project servicing file).

Identifying a Competent State or Local Housing Agency as the PAE

The new law establishes a priority for state and local public housing agencies, if qualified, to assume the PAE role through an exclusive application period.⁵ Despite the rhetorical enthusiasm for undertaking these duties expressed by governors and state agencies during the process of getting the federal law through Congress in 1997, it remains uncertain how many will actually step forward this summer to take over from HUD. Under the demonstration programs authorized in the Fiscal Year 1997 and 1998 Appropriations Acts,⁶ similar opportunities for state agencies to assume "designee" status have been slow to move to the final stage of executed agreements, primarily due to disagreements about compensation and liability.⁷

Still uncertain is how many state agencies are seriously interested, given the expanded scope and duties of the permanent restructuring program, and how many will qualify under the new law’s criteria. Certainly those agencies that have either received "designee" status or have developed management plans in preparation for filing for such status are most likely to seek the new PAE role. If your state has received designee status or has prepared a management plan, get a copy of the plan and the contract. It may provide some useful insight into the agency’s approaches on key staffing, resource or policy issues. More commonly, these documents may be silent, thus revealing an even greater need for joining the PAE program and policy-making process.

Advocates first should evaluate whether an expanded state capacity as PAE is preferable to other options. If so, then the first task is to ensure that a competent state or local public agency steps forward to seek the PAE role. If none applies, then any improvements from increased local control will be lost, along with perhaps the best opportunity for building an improved system of public accountability for program operations. Without a qualified local application, the default will probably either be continued HUD administration or a partnership between HUD and for-profit entities.⁸ It will be important to evaluate whether this option offers responsiveness to tenant and community interests.

Once the options are evaluated, advocates will eventually have to decide whether to support or oppose the PAE’s application. Usually, this decision will depend upon the PAE’s proposed program: what it proposes to do and how. You may get some insight into the PAE’s plan early on, from written documents or dialogue with PAE staff. Other state or local government legislators or officials may be helpful allies to smoke out a PAE reluctant to share specific information. Hopefully, HUD’s forthcoming rules will require a significant level of public participation in the PAE selection process, and permit advance public scrutiny of the PAE’s proposed plan (the "Portfolio Restructuring Agreement") prior to HUD approval. In some states, state legislative housing committees or state housing agencies themselves have established advisory or working groups among stakeholders and prospective public agency PAEs to commence the necessary dialogue.

The leverage to obtain stronger programs from PAEs will be a function of the federal law’s criteria for PAE selection, and a variety of federal, state and local policy and political considerations. The law establishes numerous selection criteria, including "demonstrated experience in working directly with residents of low-income housing projects and with tenants and other community-based organizations."⁹ Because of the nature of many state housing agency programs — typically administration of tax credit, bond-financing and small housing trust funds — few have an impressive record in this regard. As the law also encourages PAEs "to develop partnerships with each other and with nonprofit organizations"¹⁰ to further their ability to meet the Act’s purposes, in some cases such partnerships might be an appropriate means of fulfilling this criterion.

Since the selection process involves substantial agency discretion, politics may also play a role in approving PAE applications and programs. HUD has had some history of dealing with many of these agencies under the Section 8 state agency set-aside, various FHA risk-sharing programs, as well as the FY 1997 and 1998 "Portfolio Reengineering Demonstration" program. That experience may also prove significant — pro or con. Obtain the agency’s management plan under the demonstration and any pending or approved project restructuring agreements. Talk to organizations that have had direct dealings with the agency under their programs. These activities will help develop a picture of the agency’s experience and capacity for the tasks ahead.

Ensuring PAE Development of a Responsive
Long-Term Housing Program

In most states, this will be the hardest job and will require a sustained long-term effort. Many prospective PAEs lack the kind of experience needed to successfully run a project-based housing program. The involvement of private owners, very low-income families, and the high level of subsidy require closer supervision and more detailed regulatory compliance than many PAEs are used to providing. In particular, the intensive degree of hands-on oversight of owner and management performance will require increased agency staffing levels and different skills than most state agencies currently possess.

This challenge starts with the content of the PAE’s application to HUD, and continues with the rules, policies, and staffing plan subsequently developed by the PAE at the state or local level. Although the final boundaries of PAE discretion will be largely determined by HUD’s rules for the program, it is clear that the PAE will be addressing numerous critical programmatic and policy issues, and that little is gained from delaying the engagement process. The overall goal should be to ensure that the PAEs’ policy and program will be superior to HUD’s past performance and adequate for their role in the years ahead.

Whether in its application or in its subsequent rules and policies, each PAE’s program should address at least the following important issues:

Program policies:

Of course, later on, as the PAE’s program becomes operational, actual implementation of these policies and revisions will also be critical. The PAE’s actual practices — how the agency does its work, especially the extent to which tenants and local communities are actively involved — will determine whether the promise of the law can be realized.

Securing Adequate Resources and Protections
from State and Local Sources

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 either are part of the program or important to permit transfers of developments where owners want to sell. In addition, state or local financing vehicles to support transfers of "opt-out" or "disqualification" properties may be important pieces of a preservation strategy.¹¹

Similarly, there may be situations where state or local legislatures decide to use their programs or policies to supplement gaps in the federal or PAE schemes, or to use their police powers to regulate the conduct of housing providers to promote continued affordability or to minimize displacement. Tenant and local government notification requirements, owner duties to accept public subsidies, or rent regulations are currently being considered in various jurisdictions. Future Bulletin articles will review these legislative and funding initiatives as they take clearer shape.

Conclusion

For strong affordable housing policies, the promise of "local control" has always been a risky mixed bag. This is less true for Section 8 housing. Good results will come most often where tenants and housing advocates get involved immediately to influence the development of restructuring policy and practice at the state and local level.

1. The "Multifamily Assisted Housing Reform and Affordability Act of 1997," Pub. L. No. 105-65, tit. V, 111 Stat. 1344, 1384 (Oct. 27, 1997). See The New Section 8 Renewal and Restructuring Program: An In-Depth Review, 27 HOUS. L. BULL. 175 (Nov. 1997); Moving Forward on Project-Based Section 8 Expiring Contracts, 27 HOUS. L. BULL. 198 (Dec. 1997).
2. Under the federal law, only properties "eligible" for restructuring will be assumed by Participating Administrative Entities. Generally, these will be properties with HUD-insured or HUD-held mortgages and which also have expiring Section 8 contracts that carry Section 8 contract rents in excess of true market value. "Exempt" under the law from restructuring are those properties with certain other kinds of financing (e.g., state or local bond-financed, or HUD Section 202, or RHS/FmHA Section 515 rural rental housing loans). "Ineligible" are those properties that lack HUD-insured financing or that have Section 8 rents below true market value. Both of these latter categories will apparently remain under HUD jurisdiction for the time being.
3. See generally What Might Happen to Section 8 Properties Under the New Law? 28 HOUS. L. BULL. 17 (Feb. 1998).
4. The HUD data for every property can be found at http://www.hud.gov/hsg/hsgmfint.html. Procedures for downloading the information are described at New Web Address for Improved HUD Data on Section 8 Projects, elsewhere in this issue.
5. Pub. L. No. 105-65, § 513(b)(5).
6. See HUD Issues Section 8 Reengineering Demonstration Guidelines, 27 HOUS. L. BULL. 26 (Feb. 1997); and HUD Notice Provides Limited Guidance on Section 8 Contract Renewals, 27 HOUS. L. BULL. 59 (Apr. 1997).
7. The number currently appears to have reached somewhere between 14 and 28 states. As of February 24, 1998, according to the National Council of State Housing Agencies, HUD had executed demonstration agreements with 15 agencies — all states, with one exception. They are: Colorado, Illinois, Maine, Massachusetts, Minnesota, Missouri, New Mexico, North Dakota, Ohio, Pennsylvania, Rhode Island, South Dakota, Vermont, West Virginia, and Kitsap County (Washington). Management plans had been approved, but contracts not yet executed, for 12 more jurisdictions: the Chicago Department of Housing, the New York City HDU, the Pittsburgh Urban Redevelopment Authority, Connecticut, Florida, Kentucky, Maryland, Michigan, New York State, North Carolina, Texas, and Virginia. Also, as of February 24, 1998, Wisconsin’s management plan had been submitted to HUD, but not yet approved.
8. See Pub. L. No. 105-65, §§ 513(b)(4) and (b)(7).
9. Id. § 513(b)(1).
10. Id. § 513(b)(3).
11. State legislatures in Minnesota and California are currently considering approval of state funds for these purposes.