National Housing Law Project Housing Law Bulletin

Past articles of the Bulletin have described the mounting crisis facing the preservation of our federally subsidized and assisted affordable housing inventory that provides homes to millions of very low-income people. They have noted that both Congress and HUD are considering responses to this tremendous challenge./1/ After years of denial that preservation of these units was an important policy objective, HUD has reversed course and, on April 29, announced a forthcoming policy to offer higher Section 8 contract rents to some owners whose expiring project-based Section 8 contracts carry below-market rents, and who might otherwise exit the housing assistance program.

Accompanying HUD’s announcement was a report, called Opting In, supporting HUD’s case for preservation./2/ HUD’s new policy marks an important new initiative to preserve affordable housing units themselves, recognizing that the tenant-based assistance touted as adequate replacement does not protect residents against displacement, nor does it save the government any money.

When project-based Section 8 contracts expire, owners generally have the choice of renewing, with or without mortgage restructuring, or "opting out" of the program and converting to market operations. In 1997, Congress adopted various new authorities governing the renewal and restructuring of expiring contracts and related financing in the Multifamily Assisted Housing Reform and Affordability Act ("MAHRAA," often called "Mark to Market")./3/ This statute generally required HUD to offer renewal of many above-market Section 8 contracts with HUD-insured mortgages at new lower "market rents," and established a process whereby owners could obtain debt service relief to enable the continued provision of affordable housing. The law also permitted HUD the discretion to offer renewal of expiring below-market contracts at higher comparable market-rent levels in order to preserve affordable housing./4/

Unfortunately, since October of 1997, HUD had never acted to implement this discretionary authority. Below-market owners faced essentially a rent-freeze policy sure to drive many out of the program through opt-outs. The vouchers provided to tenants have been based on ordinary voucher payment standards with no obligation of the owner to accept them, so tenant displacement became commonplace. Thousands of high-quality homes were lost while HUD deliberated.

But the "opt-in" policy announced by Secretary Cuomo on April 29, if implemented, could stem these losses. Apparently, this policy will be established only as an "emergency" policy to address those contracts expiring during the remainder of FY 1999. Although no actual policy was issued as of press time, and a Notice is apparently forthcoming before the end of May, this policy, in brief, reportedly will address properties that meet the following criteria:/5/

• it must have a project-based Section 8 contract expiring on or before September 30, 1999;
• the mortgage must be subject to prepayment without HUD’s consent;
• the owner must submit a market comparability study;/6/
• the project must be in good physical condition;/7/
• the project must have a higher market rental value;/8/ and
• the owner must commit to a five-year agreement to accept annual renewals of the Section 8 contract at comparable market rents, but not to exceed 150 percent of Fair Market Rents.

HUD’s announcement represents an important breakthrough for the Department’s preservation policy, which has been nonexistent since early 1995 when HUD first attempted to kill the Title VI Preservation program./9/ Numerous Congressmembers from both parties appeared with Secretary Cuomo at the press event announcing the policy, which should signal a higher level of cooperation between HUD and Capitol Hill in devising refinements and securing necessary funding to continue future implementation.

While an important and major first step, the announced policy leaves a few gaps that need to be addressed. These include:

• ensuring preservation of properties that have higher values than their current use, but less than 110 percent of FMR;
• making additional statutory or regulatory changes necessary to ensure that owners of budget-based Section 236 or 221(d)(3) BMIR (Below Market Interest Rate) properties with Section 8 Loan Management Set-Aside assistance can access the increased cash flow from the mark-up;
• guaranteeing protection for tenant populations facing special hardships from conversion, including elderly and disabled tenants, and large families;
• permitting waivers or local supplementary funding for higher value properties beyond the 150-percent ceiling;
• clarifying the mechanics of the annual rent adjustment;
• establishing next year’s policy; and
• obtaining any additional necessary funds from Congress to implement the policy, beyond HUD’s budget freeze request for Section 8 renewal funding.

Congress’ and HUD’s public recognition of the importance of preserving HUD-assisted housing will hopefully make the task of addressing these shortcomings easier. Look for news of greater progress on the preservation front from the efforts of tenants and advocates over the next few months.

Notes

1    See New Preservation Proposal Introduced in Congress, 29 HOUS. L. BULL. 52 (Mar. 1999), describing Vento-Ramstad bill, H.R. 425 (106^th Cong., 1^st Sess., 1999); Preservation Crisis Mounts: HUD and Congress Respond, 29 HOUS. L. BULL. 67 (Apr. 1999).

2    HUD, Opting In: Renewing America's Commitment to Affordable Housing (Apr. 1999), available at <http://www.hud.gov/pressrel/optingin.html>. It includes state-by-state data on Section 8 units at risk of leaving HUD subsidy programs, the number of project-based and tenant-based Section 8 units, the number of project-based Section 8 units in each state expiring by 2004, and the number of units in each state that have left the Section 8 project-based program between 1997 and 1999.

3    Pub. L. No. 105-65, Title V, 111 Stat. 1343, 1384 (Oct. 27, 1997).

4    Id., § 524 (a)(1).

5    See Memorandum for All HUB Directors from Robert W. Reavis, Acting Deputy Assistant Secretary for Multifamily Housing, Re: Clarification of Notice 98-34 Renewal Policy (May 7, 1999) at 4, available from the HUD Website at http://www.hud.gov/fha/mfh/pre/98-34.pdf.

6    Per HUD Notice H 98-34 (Oct. 16, 1998). See HUD Issues Guidance Re FY 1999 Expiring Section 8 Contracts, 28 HOUS. L. BULL. 213 (Dec. 1998) (reviews HUD Notice H 98-34 re FY 1999 expirations).

7    HUD will apparently require a score of at least 60 points from its Real Estate Assessment Center’s recent inspection process.

8    HUD will apparently limit the mark-up policy to properties where unassisted market rents for comparable area projects would be at least 110 percent of area Fair Market Rents.

9    The Low-Income Housing Preservation and Resident Homeownership Act of 1990 ("LIHPRHA"), 12 U.S.C.A. §§ 4101 et seq. (West Supp. 1998).

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