National Housing Law Project Housing Law Bulletin

HUD’s Final "Mark Up" Notice Contains Important Changes

The May Bulletin previewed HUD’s new "opt-in" policy to mark up below-market Section 8 rents on certain properties with expiring subsidy contracts./1/ That preview was based upon HUD’s announcement at an April 29 press conference announcing this new preservation initiative to forestall owner opt-outs from the Section 8 program./2/ In June, HUD finally issued its formal Notice establishing the initiative,/3/ which contains several important changes to what had been earlier described.

Background. When below-market project-based Section 8 contracts expire, owners generally have the choice to renew or "opt out" of the program and convert to market operations. In 1997, Congress provided HUD the discretion to offer renewal of these expiring below-market contracts at higher comparable market-rent levels in order to preserve affordable housing./4/ HUD never acted to do so. Below-market owners faced essentially a rent-freeze policy, and the replacement vouchers provided to tenants were insufficient to protect tenants against displacement. Many good-quality homes were lost while HUD deliberated.

The New Policy. HUD’s emergency initiative can provide some owners with additional financial incentives to reduce opt-outs. Key elements of the new policy include:

• an expiring project-based Section 8 contract (other than Section 8 Moderate Rehabilitation);
• no use restrictions that an owner cannot unilaterally remove;
• the owner must submit a market comparability study showing rents above 100 percent of Fair Market Rents (FMR) (waivable);/5/
• the owner must be in good standing and the project must be in good physical condition;/6/ and
• the owner must commit to a five-year agreement to accept annual renewals of the Section 8 contract with rent adjustments based on HUD’s OCAF formula, but not to exceed 150 percent of FMR (rent limit waivable).

The policy is not available to not-for-profit mortgagors. Owners interested in seeking a mark-up must also submit a request for consideration to the HUD Hub or Program Center. If the property meets the initial eligibility criteria, then HUD must order its own comparability study and offer the owner a temporary three-month extension contract at current rents while the final eligibility determination (usually centered on comparable rents) is processed.

Important Changes From Prior Reports. The final Notice contains at least three provisions that differ from prior reports of the policy’s content.

The final policy covers more than just those contracts expiring during the remainder of FY 1999 (i.e., before September 30, 1999). Any eligible property with a contract expiring prior to the policy’s expiration date (June 30, 2000) can be considered for the initiative./7/

Also different in the final Notice is the waivability of the minimum (110 percent of published FMR) and maximum (150 percent of FMRs) comparable market values. HUD’s Assistant Secretary for Housing will consider recommendations from area HUD Hub Directors to waive the lower initial eligibility threshold upon a showing of at least two reasons why the property represents a "critical affordable housing resource." These include showing that (1) vouchers would be difficult to use in the local area, (2) a vulnerable tenant population, such as the elderly, the disabled, or large families, resides in the housing, or (3) the property represents a community preservation priority, demonstrated by a contribution of state or local funds. These same criteria apply for waivers of the maximum HUD mark-up level, 150 percent of FMR.

Finally, the final Notice does not provide project owners with annual market-based adjustments to the initially established market comparable rent levels. Rent adjustments during the five-year commitment required of participating owners will instead be based solely on operating costs, using HUD’s Operating Cost Adjustment Factor (OCAF) which usually lags behind true market increases substantially in areas where mark-up projects are likely to be located. The Notice does include a waiver of the distribution limitations for certain Section 236 project owners, so that they might receive some of the additional cash flow produced by the mark-up and thus be encouraged to participate, rather than opt-out.

Problems to be Addressed. HUD’s Notice addresses many of the issues that were anticipated as problems. Remaining gaps include:

• ensuring preservation of properties that have higher values than their current use, but less than 110 percent of FMR;
• covering properties with expiring Section 8 contracts under the Moderate Rehabilitation program;
• ensuring that properties purchased by nonprofit organizations for preservation can qualify;
• guaranteeing protection for tenant populations facing special hardships from conversion, including elderly tenants, disabled tenants, and large families, rather than simpy making waivers possible;
• providing annual market-based rent adjustments in more rapidly inflating rental markets to encourage owner participation;
• establishing a permanent policy; and
• obtaining any additional necessary funds from Congress to implement the policy, beyond HUD’s budget freeze request for Section 8 renewals.

In addition, where opt-outs do occur, Congress must also act to guarantee protection for all tenants facing hardships from conversion, including the elderly, disabled and large families. A comprehensive policy must also provide additional capital funding to ensure preservation of budget-based Section 236 or 221(d)(3) BMIR properties (with no or just partial Section 8 Loan Management Set-Aside assistance) that can only obtain increased cash flow from the Section 8 units under this new emergency policy.

HUD’s new policy for preserving some assisted housing has received Congress’ blessing and will form the basis of a more comprehensive solution, perhaps through additional legislation later this year./8/

Notes

1    See HUD Finally Announces "Mark Up" Policy to Prevent Some Section 8 Opt-Outs, 29 HOUS. L. BULL. 96 (May 1999).

2    Accompanying HUD’s announcement was a report supporting HUD’s case for preservation. See 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    HUD, Emergency Initiative to Preserve Below-Market Project-Based Section 8 Multifamily Housing Stock, Notice H 99-15 (issued June 16, 1999, expires June 30, 2000). To obtain the full text of the Notice, go to http://www.hudclips.org , click on the link to "1999 Housing Notices", and go to H 99-15.

4    Pub. L. No. 105-65, § 524 (a)(1) (1997).

5    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).

6    HUD requires a score of at least 60 points from its Real Estate Assessment Center’s recent inspection process, with no outstanding exigent health and safety violations. HUD Notice H 99-15, p. 7 (June 16, 1999).

7    The Notice itself establishes no limit on when the existing Section 8 contract must expire, but it runs only until June 30, 2000. Conceivably any contract expiring during FYs 1999 or 2000 could be eligible if processed before the expiration of the Notice, which one hopes will be renewed at that time.

8    See Preservation Issue Heats Up in Congress, 30 HOUS. L. BULL. XXX (July/Aug. 1999).

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