National Housing Law Project Housing Law Bulletin

In March, the House Republican Housing leadership introduced legislation to address the ongoing crisis posed by private owners’ withdrawal from the project-based Section 8 program upon contract expiration. The bill, H.R. 1336, the "Emergency Resident Protection Act of 1999," has been introduced by Representatives Lazio (R-NY), Leach (R-IA) and Walsh (R-NY) to respond to the opt-out crisis that now affects a large segment of the privately-owned HUD-assisted affordable housing stock around the country./1/

Whatever its deficiencies as housing policy, this bill represents an important recognition of the substantial problems posed by HUD's current rent freeze policy for below-market developments with expiring contracts./2/ This policy prevents owners from capitalizing on any unrealized equity gains in below-market properties, and forces many owners to withdraw from the program. The bill recognizes the compelling need for more responsive federal policies to protect tenants and preserve housing. This article briefly reviews H.R. 1336 and the major policy issues it raises.

Tenant protections. HUD’s position is that it currently lacks any statutory authority to provide more than ordinary vouchers to tenants residing in these opt-out units. H.R. 1336 would begin to fill that void.

As drafted, H.R. 1336 would require HUD, subject to appropriations, to provide so-called enhanced vouchers for elderly and disabled Section 8 tenants where project-based Section 8 contracts are not renewed by owners (opt-outs) in favor of a market-rate conversion. These vouchers, in contrast to regular vouchers which are based upon a local payment standard, would provide assistance up to the new market rent levels for tenants that remain if it is determined reasonable by the public housing authority (PHA). The same enhanced voucher concept has been used over the past few years to temporarily protect tenants threatened with rent increases after prepayment of a HUD-subsidized mortgage. Tenants that choose to move would receive regular voucher assistance at ordinary PHA payment standards. The bill would also provide HUD with discretion to make enhanced vouchers available to non-elderly and non-disabled Section 8 tenants in residence at contract expiration where the project is located in a HUD-determined "low vacancy area," with an inadequate supply of habitable affordable units for families with tenant-based assistance.

HUD’s Authority to "Mark Up" Project-Based Contracts. The bill would revise HUD’s current discretionary authority to increase the rents paid under the project-based Section 8 contract in order to provide incentives for owners to remain in the program and preserve the housing as affordable. This provision would leave in place HUD's discretionary authority, without making it mandatory. It would also establish renewal rent levels for any HUD offers that are made. These levels would be set at:

• 90% of comparable market rents for projects with current rents less than that amount;
• existing rents for projects with current rents between 90% and 100% of market comparables; and
• comparable market rents for projects ineligible for restructuring with current rent levels higher than market comparables.

The bill would also add refinancing as an eligible use of a "rehabilitation" grant under the not-yet-implemented authority provided HUD by Section 531 of 1997's "Mark to Market" legislation. Finally, another provision of H.R. 1336 would permit certain Section 236 property owners to retain excess income from rents paid by tenants beyond HUD-approved basic rent levels, rather than remitting those funds to HUD, if those funds are used for specific project purposes.

Policy Issues Raised by Bill. The bill’s provisions on both mark-ups and enhanced vouchers require modest improvements to address the variety of risks posed to residents and communities by current federal policies governing Section 8 opt-outs.

No requirement that HUD mark up in specific situations. HUD has had authority to mark up, but has not used it. This bill would not end HUD's inertia because it does not mandate action on HUD’s part. If Congress does not provide sufficient funds to mark up all below-market properties, as is probable, then HUD will have to make choices about which properties should receive these increased rent offers. The bill should therefore be revised to specify the circumstances in which HUD must act to preserve housing, such as properties located in tight submarkets, for tenant populations where vouchers do not work well (e.g., elderly, people with disabilities, and large families), or where HUD action would advance Fair Housing objectives or local preservation strategies.

The mark up levels. By specifying the new rent levels when HUD does make an offer, the bill removes flexibility for HUD to save scarce resources where appropriate or to spend slightly higher amounts (although still less than market comparables) required in order to ensure preservation in a particular situation or to further other public policy goals, such as permanent affordability. The bill would not relieve the public sector of any administrative burden because comparable market rents must still be determined in every case before the specified percentages mandated by the bill are applied. In contrast, the standard in current law "up to comparable market rent," although not utilized to date, leaves some flexibility for HUD to offer more than 90 percent of comparables where necessary, or less than 90 percent where adequate, to satisfy an existing owner, while carrying no greater administrative burden beyond requiring a negotiation with the owner. Any other approach to further reduce administrative burdens, such as shifting to a bright line pre-determined figure, such as the local published HUD Fair Market Rent (FMR) or some percentage of that figure, would not solve the problem in many tight markets where opt-outs are occurring or likely, since market values may exceed FMRs.

No Owner Commitment. The bill requires nothing from owners beyond the commitment for the one-year contract term. Both the public and the tenants deserve more security. In exchange for receiving these new benefits, owners should be required to commit to renew the contract (with annual formula rent adjustments over the term) for a specified period of time, at least ten years.

Enhanced Vouchers.

These are an important addition to the tenant protection policy as a supplement for situations in which an owner opts-out even after receiving a higher rent offer from HUD under an appropriately revised project-based mark-up policy. Enhanced vouchers are only a last-resort safety-net policy for current tenants. Here’s why:

• Despite their high cost, enhanced vouchers do not preserve housing.

• They do not eliminate disputes between owners and PHAs about the true reasonable rent for the unit, so they would not resolve one of the major problems presented by the recent Iowa opt-outs.

• The assistance level remains set at the initial "enhanced" level (under FY '99 appropriations language), and does not increase to cover subsequent rent increases, whether in first year or subsequently. The tenant must bear all subsequent rent increases, usually on an extremely limited income. The protection offered is only temporary and economic displacement is merely deferred.

• The owner's obligation to accept the voucher remains unclear, both initially and subsequently (since there is no longer any good cause eviction requirement at the end of a lease term). This lack of security of tenure presents a huge risk for tenants, especially for elderly and large families.

• Families are not guaranteed any protection under H.R. 1336, unlike their prepayment counterparts. In order to even trigger HUD’s discretion to provide this protection for families, HUD has to determine whether the property is located in a low-vacancy area with an inadequate supply of housing for voucher holders. Given HUD's past public policy preference for vouchers, the bill should provide more direction on the inadequate supply definition.

• In the wake of the upheaval created by opt-out notices, many tenants cannot wait until contract expiration to receive assistance if they decide to move. The bill's requirement that tenants be in residence at expiration should be advanced to the date of the service of the notice which stated the owner's final decision to opt-out of the contract.

• Tenants in properties that opted out in FY 1999 are not covered. If they are still in residence, they should also receive the new benefits to offset any increased rent burdens they experienced.

• The bill’s definition of an elderly or disabled family may not cover families with an elderly or disabled family member who is not head of household or spouse, despite the fact that these families face similar relocation problems.

Nevertheless, H.R. 1336 marks an important step forward in demonstrating Congressional awareness of the problems created by current federal budget and policy decisions, responsibility for which is fairly shared by both Capitol Hill and the Administration. Now that HUD is poised to act under its existing authority, Congress must work with HUD to implement a rational preservation policy that fills gaps in the HUD initiative and provides better protections for housing and residents. This legislation could provide a foundation for an important part of that effort. It is expected that H.R. 1336 will be marked up and folded into the FY 1999 HUD-VA-IA appropriations bill when that process starts to move forward, either in early summer or later in the year when the budget logjam is broken.

Notes

1    For background on the mounting loss of affordable housing, see Preservation Crisis Mounts: HUD and Congress Respond, 29 HOUS. L. BULL. 67 (Apr. 99).

2    As reviewed in last month’s Bulletin, HUD announced on April 29 a new but limited emergency policy to address this problem by providing rent increases to some owners of properties with contracts expiring in FY 1999. See HUD Finally Announces "Mark-Up" Policy to Prevent Some Section 8 Opt-Outs, 29 HOUS. L. BULL. 96 (May 1999).