National Housing Law Project Housing Law Bulletin

HUD Issues Interim Multifamily Property Disposition Rule

HUD has recently issued an interim rule to implement the sweeping statutory changes to the multifamily property disposition program enacted by Congress in 1994.¹ This rule² is notable primarily because it uses a new format to present the revised requirements for the program, with both a question and answer format and boxed lists to simplify the presentation of a complicated statute. More important, however, is its failure to provide meaningful guidance to help resolve any of the key issues to be decided when HUD uses the enormous discretion granted by the statute to foreclose on or sell a development. By simply parroting the literal requirements of the statute, HUD leaves these decisions to ad hoc actions of local field offices — the net effect of which is that only a select few of these many developments will be preserved and improved.

The new law and rule dramatically increase HUD's flexibility in disposing of multifamily housing. By reducing the subsidy requirements for sales that had been previously mandated, the new relaxed restrictions have made it far easier for HUD to dispose of multifamily properties, and HUD has stepped up the pace of its sales. This dramatic reduction in subsidies, in turn, requires enormous vigilance at the local level to ensure that disposition plans are in fact sufficient to produce viable projects after sale to new ownership.

The new program raises many issues. Key among them are the following:

1. Subsidy type

Under the new law and rule, the post-disposition subsidy level will generally be determined by the project's previous subsidy status and level. In the rule, HUD has indicated that it will generally carry forward any existing project-based subsidies at disposition sales (except for many Section 8 LMSA units in unsubsidized properties), although the new law provides other subsidy options. HUD calls this a "basic action."³ Left largely unsubsidized will be units that formerly had no Section 8 contract, both in subsidized projects and those occupied by low-income families in unsubsidized projects.

The rule also specifies other discretionary options provided by the statute as "alternatives to basic actions."⁴ These include such actions as substituting Section 8 tenant-based assistance for project-based Section 8. This is possible for units in subsidized projects (up to 10 percent of the subsidized units disposed of by HUD in any fiscal year) and without limitation in unsubsidized projects, if HUD makes an "adequate supply" determination about the local market. It is also possible for any development, so long as HUD imposes some rent restrictions for at least 20 years, regardless of the characteristics of the local market.⁵ Of fundamental importance is that the rule does not specify any criteria that HUD must consider in making the choice between a "basic action" and an alternative. Providing guidance for critical decisions is what many of us thought was the central purpose of administrative rules, but this seems lost on the Department.

2. Definition of "adequate supply" for permitting substitution of tenant-based subsidies

In the new rule,⁶ HUD has not properly clarified the concept of an adequate or sufficient housing supply that will permit the substitution of certificates or vouchers for the project-based subsidies that would otherwise be required. The rule details only what HUD will look at, not what that data must show in order for HUD to arrive at the necessary finding.

The rule requires only that HUD use "established market analysis techniques," and consider vacancy and production rates, losses to the supply, extraordinary rates of rent increases, and inability of tenant-based subsidy holders to find adequate housing. The adequate supply finding should be relatively easy for HUD to make, since overall vacancy rates may have little to do with the housing market low-income people face and are not reduced by the number of units that are uninhabitable. This test will provide no protection against losses to the stock where the substitution of tenant-based subsidies would be inappropriate.

The rule should have focused first on whether there is an adequate supply of vacant habitable housing that could provide tenant-based subsidy holders affordable housing under the PHA's actual payment standard (within 30 percent of income). The second appropriate inquiry should have been whether certificates or vouchers will actually work in the relevant marketplace for the number and types of families that require subsidies. HUD should seek and obtain real data about success rates for tenant-based subsidy holders and about which kinds of families have difficulties in securing a unit, and examine how success correlates with the populations served or potentially served by a project-based resource. By not requiring collection and evaluation of this data, HUD is passively assuming that someone else will develop and present this information to HUD. The likelihood of this happening is remote, which casts doubt on HUD's concern about the rule's practical effect on program participants.

Where tenant-based subsidies are substituted for project-based ones, the rule nowhere requires HUD to provide additional resources to ensure the success of tenant-based subsidies for the affected tenants. This is very important, since on average about 20 percent of families that get certificates cannot secure a unit. Wherever portable Section 8 subsidies are substituted, HUD should require special PHA assistance in finding units, in negotiating with prospective lessors, in adjusting the Fair Market Rents (FMRs) or payment standards, or in extending the lifespan of the certificate or vouchers to permit placement.

3. Rehabilitation requirements and rent and use restrictions

HUD is as vague as the statute about requiring that developments purchased at foreclosure or from HUD actually be maintained in habitable condition. Habitability arises only in the context of selecting purchasers, who must be determined capable of providing habitable housing. Any rent and use restrictions placed on developments generally last only for 20 years, as opposed to the term of the projects' useful life. (Where have we run into this problem before?) The rent restrictions themselves will do nothing to preserve affordable housing, since they are set so high (30 percent of 50 percent of area median income for units occupied by very low-income households, and 30 percent of 80 percent of area median income for units occupied by low-income households) that they generally will approximate or exceed true market rent levels. HUD has declined to require development of appropriate restrictions that are less than the caps. HUD could promote real economic mixing in these developments among the entire spectrum of eligibility by requiring affordability to various bands within the eligible population. Hopefully, this will be done creatively on a case-by-case basis, since the cap rents will rarely be affordable to the targeted populations and the units need to be marketable. But the rule does not suggest, much less mandate, such an approach.

4. Decisions not to preserve

The rule also provides that HUD may decide not to preserve a development if the cost of rehabilitation and operating expenses could not be supported by rents within 120 percent of the Section 8 Existing Housing FMRs for the area, if there are "significantly deteriorated surrounding neighborhood conditions, high crime rates or drug infestation," or if HUD determines the project "unfit for rehabilitation."⁷ The future of many developments could be jeopardized under loose interpretation of this provision.

These rules will govern not just those developments currently in trouble or in HUD's inventory, but also perhaps many thousands of units likely to default in the future. Congressional actions concerning Flexible Subsidy and expiring Section 8 LMSA funding, along with any action to adopt certain parts of HUD's Reinvention Blue print, will certainly add to the flow of troubled projects. These developments exist in practically every city and town throughout the country. Tenants, communities and their advocates will thus have many opportunities to struggle with the application of these rules, especially as administrations come and go.

We have come full circle. In the wrong hands or with dwindling resources, this unbridled discretion will return us to the failed policies of selling developments "as-is" or demolition that HUD first pursued in the 1970s. Only the organized and the lucky now have a temporary chance for a better result.

1. Multifamily Property Disposition Reform Act of 1994, Pub. L. No. 103-233, § 101, 108 Stat. 342 (1994). The new law rewrites the former property disposition statute, which was created by Section 203 of the Housing and Community Development Amendments of 1978, amended in several respects since then, and which is codified at 12 U.S.C.A. § 1701z-11 (West Supp. 1995). See Brief Summary of New HUD Multifamily Property Disposition Law, 24 HOUS. L. BULL. 88 (Sept./Oct. 1994).
2. 60 Fed. Reg. 11,844 (Mar. 2, 1995).
3. New 24 C.F.R. §§ 290.54 and 290.64.
4. Id., new §§ 290.56 and 290.66.
5. Id., new § 290.70.
6. Id., new § 290.5, definition of "sufficient habitable, affordable . . . rental housing."
7. Id., new § 290.88.

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