National Housing Law Project Housing Law Bulletin

HUD Notice Provides Limited Guidance on Section 8 Contract Renewals and Opt-Outs

Last October, HUD issued a Notice (H 96-89) providing administrative procedures governing renewals of expiring project-based contracts not subject to the demonstration program, as well as situations where owners decline to renew.¹ This Notice implements the authority granted by Section 211 of the Fiscal Year 1997 Appropriations Act,² which requires HUD to renew, upon owner request, certain expiring contracts at current rent levels, but not exceeding 120 percent of the area Fair Market Rent (FMR), and to renew others regardless of rent level.³ HUD has since issued other clarifications to this Notice.⁴ Waivers of the terms of this Notice must receive the approval of the Assistant Secretary for Housing/FHA Commissioner.

When owners request a renewal,⁵ the FY 1997 Appropriations Act requires 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 one-year 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 these terms will receive no rent adjustment during the one-year term of the renewed contract.

The statute also exempts 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.

Renewal terms

The Notice indicates that there may be situations where the owner may obtain a renewal term of less than one year. One is where the owner does not wish to renew but has failed to provide tenants with the full required one-year notice of contract expiration,⁶ in which case HUD will provide a renewal term of whatever length is necessary to enable to owner to fulfill the one-year-notice requirement. Since such an owner's only other option is to forego the income that would be supplied by the Section 8 payments (as tenant rents cannot be increased), most owners who failed to give proper notice will probably take the shorter term. Another short-term renewal situation will be for those owners who are seeking participation in the demonstration program, who need at least a six-month contract during which to negotiate the terms of the mortgage restructuring and subsidy reduction and renewal.⁷ Other owners could still negotiate a renewal term of shorter than one year if they wished to keep their conversion options open, and if HUD is willing.

Compliance with Housing Quality Standards

HUD's Notice prohibits renewal of those units that fail to meet HUD's Housing Quality Standards (HQS) at the time of renewal, if HUD has followed the proper enforcement procedures. The statutory provision is more general, barring renewal if HUD determines that the owner has engaged in material adverse financial or managerial actions or omissions. Hopefully, HUD will exercise this prohibition appropriately, not renewing those contracts where violations are significant and apparently unremediable, and pursuing abatement remedies and other strategies to bring into compliance units susceptible to repair. On termination for HQS violations, HUD will provide tenant-based assistance to eligible families on or before the date that the contract expires. However, because of the long processing time to accomplish the conversion and commence the flow of tenant-based assistance, some tenants will doubtless experience uncertainty or direct financial exposure during the conversion. They will have to find a new unit meeting the HQS in order to use their tenant-based assistance and, according to HUD, must give their current landlord 30 days' notice of termination.

Lease addendum

The Notice contains a new addendum that owners will be executing with tenants concerning termination of tenancy. It adds expiration of the Section 8 contract as cause for termination. HUD specifies no notice period for this type of termination beyond what may be required by state or local law. However, before such a provision could become grounds for eviction, the statute requires an owner to have served the tenant a one-year notice of expiration of the Section 8 contract,⁸ unless the tenant has moved into the development after the one-year notice was served. This notice must inform the tenant of either the expiration of the contract or the owner's intention not to renew it. Oddly enough, now that renewals are for one-year terms, an owner who renews must simultaneously serve tenants with a one-year expiration or termination notice, even though the owner intends to renew if Congress appropriates the requisite funds. Owners who fail to provide this notice must agree to a renewal for whatever period is necessary to fulfill the one-year notice, or must accept rents from tenants at no more than their Section 8 contributions for the balance of the required one-year period, without benefit of the Section 8 assistance payments.

In addition, owners who do not intend to renew the 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.⁹ This notice should trigger HUD's processing of the tenant-based replacement housing assistance. HUD's Notice also states that early termination of the Section 8 contract will not generally be considered, hinting that there may be approvable circumstances so long as the one-year notice is given. 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.

Replacement subsidies upon proper termination

Where an owner has properly terminated the Section 8 contract, HUD must provide eligible tenants with one-year tenant-based assistance as of the contract's expiration date, if appropriated funds are available.¹⁰

Moderate Rehabilitation contract expirations

During FY 1997, most Moderate Rehabilitation contracts are now renewable for one-year terms, subject to the same 120-percent or current rent limits. HUD's guidelines are set forth in a separate notice.¹¹

Minimum rents and other provisions

Beginning with the payment voucher submitted for tenants effective December 1, 1996, this Notice implements the authority provided HUD by the FY 1997 Appropriations Act to require minimum rents of up to $50 monthly, setting the minimum rent at $25 for all project-based Section 8 recipients. The Notice specifies certain exceptions, including families working for at least 20 hours per week with an 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. The Notice also suspends federal preferences,¹² and implements the provisions establishing an additional FMR cap for Section 236 projects, along with other Section 236 rent changes.

¹ HUD Notice H 96-89, "FY 1997 Appropriations Act" (Oct. 15, 1996, expires Oct. 31, 1997).

² Pub. L. No. 104-204, § 211, 110 Stat. 2874 (Sept. 26, 1996).

³ See Another One-Year Reprieve for Most Expiring Section 8 Housing, 26 HOUS. L. BULL. 133 (Oct. 1997); see also 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 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, expires 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.

⁵ The Retsinas Nov. 1 memo reiterates that owners of properties with expiring use contracts and rents less than 120 percent of FMR may elect a renewal under either Section 405(a) of the 1996 Continuing Resolution, Pub. L. No. 104-99, 110 Stat. 26 (Jan. 26, 1996), or Section 211 of the FY 1997 Appropriations Act, supra note 2. The rent levels under both methods are capped at 120 percent of FMR, but owners may receive budget-based rent increases of up to 5 percent by using Section 405, rather than Section 211's rent freeze. Further, Section 405 renewals cover only occupied units.

⁶ 42 U.S.C.A. § 1437f(c)(9) (West Supp. 1996).

⁷ See HUD Issues Section 8 Reengineering Demonstration Guidelines, 27 HOUS. L. BULL. 26 (Feb. 1997).

⁸ Id. HUD has prepared a form notice for this purpose. HUD Notice H 96-89, Attachment 6.

⁹ 42 U.S.C.A. § 1437f(c)(8) (West Supp. 1996).

¹⁰ 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).

¹¹ HUD Notice PIH 96-95 (Dec. 24, 1996).

¹² The Retsinas Nov. 1 memo also takes the position that local preferences have been suspended as well.