National Housing Law Project Housing Law Bulletin

Preservation Issue Heats Up In Congress

Both the House of Representatives and the Senate are considering bills this summer addressing the need to preserve the existing HUD multifamily housing stock./1/ Despite significant shortcomings, these bills represent new Congressional awareness of the inadequacy of HUD’s preservation policies./2/

In March the House Republican housing leadership introduced H.R. 1336, the "Emergency Resident Protection Act of 1999." H.R. 1336 proposes to respond to the Section 8 opt-out crisis facing the nation’s privately-owned HUD-assisted affordable housing stock by increasing or "marking-up" below-market Section 8 contract rents and by providing enhanced vouchers to protect some tenants from displacement./3/ Earlier in the year, bi-partisan sponsors introduced H.R. 425, a bill to provide federal matching grants for preservation activities./4/ Since those initiatives, the House sponsors have taken action to revise and combine their two bills into a single piece of authorizing legislation, H.R. 202, via a staff "Discussion Draft" dated June 29, 1999.

On the Senate side, two similar and separate recent bills--S.1318 and S.1319-- also now address the preservation issue. S. 1319, sponsored by HUD Appropriations Committee Chair Senator Bond, would address the opt-out risk through mark-up of below-market Section 8 contracts and the provision of enhanced vouchers. The other bill, S. 1318, sponsored by Senators Jeffords and Kerry, would provide matching grants for preservation.

This article briefly reviews the major changes in the new House draft "combination bill" from the prior bills, and the major provisions of the pending Senate bills.

Discussion Draft of House "Combo Bill" (H.R. 202)

As mentioned above, the House Housing Subcommittee staff proposes to combine the main provisions of H.R. 1336 and H.R. 425 into one proposal, which will become part of another existing bill. That bill, H.R. 202, is another major initiative of the Subcommittee primarily intended to convert the financing and rental assistance structure of pre-1991 Section 202/Section 8 supportive properties for the elderly. The staff hopes to move this bill into a Subcommittee mark-up in September of 1999, or otherwise gain sufficient bi-partisan support so that it can be attached to an appropriate legislative vehicle, such as budget or appropriations legislation, later this session.

The Discussion Draft of H.R. 202 differs from the prior House bills reviewed in past Bulletins in the following ways:

• It would require that HUD offer to mark-up below-market Section 8 contract rents where the property serves the elderly or disabled, large families, a rural area with an inadequate housing supply, or a "low vacancy area."

• Section 8 contracts on Section 236 or Section 221(d)(3) BMIR properties would be eligible only if the "comparable market rent" is at least 10 percent more than the rent being received by the owner (including any additional subsidy such as the Section 236 Interest Reduction Payment).

• Section 8 renewal rents for eligible properties would be set at comparable market rent levels.

• Mark-up renewal contracts would have a five-year term.

• When owners do choose to opt-out, HUD must provide enhanced vouchers not just to tenants who are elderly or with disabilities, but also to families with at least one minor child. HUD would also have the discretion to provide these special vouchers to other assisted tenants in low-vacancy areas.

• Preservation matching grants would be provided on a less generous basis--one federal dollar for each non-federal dollar, and only for half of locally controlled, federally initiated resources such as tax credits and bond proceeds committed to preservation.

• Matching grants would be restricted to properties with a binding commitment to transfer ownership to a nonprofit./5/

• Matching grants could only be used for properties with HUD-insured or held mortgages that serve the elderly or disabled, large families, a rural area with an inadequate housing supply, or a "low vacancy area," or for properties that have an expiring project-based Section 8 contract.

• Appropriations for the matching grant program would be authorized at the woefully inadequate level of $20 million annually.

The House Subcommittee staff intends to make further revisions to the June 29 draft of H.R. 202 and expects to issue another version during the August recess that can serve as the basis for a mark-up or other legislative action in September. Advocates will continue to press for several significant improvements.

On July 1, 1999, Senator Christopher Bond (R-MO), chair of the HUD, VA and Independent Agencies Appropriations Subcommittee, introduced S. 1319, the "Save My Home Act of 1999." This is essentially a Senate version of the House bill, H.R. 1336. While it is not a comprehensive solution to the opt-out problem, the Senate bill does include several improvements over the House version, and hopefully will be incorporated into the FY 2000 HUD-VA-IA appropriations bill later in the year as budget negotiations proceed.

Like the House bill, S. 1319 provides for rents in below-market projects with expiring contracts to be increased or "marked-up" to market level, and provides enhanced tenant-based vouchers for many tenants of owners who opt-out. It specifies methods for appraisals to determine local market rental values and requires HUD to establish procedures to facilitate the sale or transfer of projects where renewal efforts are unsuccessful. The bill also authorizes HUD to renew expiring subsidy contracts at rent levels that "do not exceed" comparable rents in the market area. HUD may elect to provide a renewal at the full market comparable level if necessary to preserve affordable housing, or perhaps a lesser amount if an owner is willing. Renewal contract terms may be for periods of up to 10 years and subject to annual appropriations, both of which may provide greater certainty for owners and tenants.

• Similar to the new House Discussion Draft of H.R. 202, the Senate bill requires HUD to offer to renew expiring contracts for projects located in "low vacancy areas." The bill defines a low vacancy area as one where there is lack of available affordable housing, where tenants of expiring subsidy projects would not be able to locate suitable units, or where tenants would not be able to use tenant-based assistance successfully. The bill would allow HUD to designate low vacancy areas.

• Also similar to the House bill, S. 1319 would require HUD to offer to renew expiring contracts to projects where a predominant number of units are occupied by elderly or disabled families.

• When subsidies are not renewed, HUD would be authorized to make enhanced tenant-based vouchers available to tenants residing in a project upon subsidy expiration./6/ HUD would be authorized to provide an enhanced voucher to any family residing in a project at the time of the expiration of the subsidy, regardless of whether the family is elderly or disabled (as in H.R. 1336) or whether the project is in a low vacancy area (as in the draft H.R. 202)./7/

• The bill would require HUD to provide enhanced vouchers to opt-out tenants residing in low vacancy areas. By comparison, draft H.R. 202 would mandate them for tenants who are elderly or with disabilities, and families with at least one minor child, regardless of market conditions.

• S. 1319 specifically authorizes appropriation of the funding necessary to provide voucher assistance through FY 2004.

• Detailed provisions would determine market rents for mark-ups. The bill requires appraisals to be to be performed by persons of "demonstrated competence" according to the Uniform Standards of Professional Appraisal Practice. Appraisals must be based on at least two comparable properties in the market area. HUD must also assign at least one staff member who meets all licensing requirements and has demonstrated competence in conducting appraisals to each field office responsible for evaluating appraisals in the state. HUD would be required to establish an "Appraisal Clearinghouse" to collect appraisal data and develop model standards for appraising multifamily housing.

• HUD would be required to establish procedures to facilitate the voluntary sale or transfer of projects whose contracts are not renewed. Preference is to be given to tenant organizations, community-based non-profits, and public agencies.

• Through an amendment of Section 514 of the Multifamily Assisted Housing Reform and Affordability Act,/8/ HUD would be authorized to provide technical assistance funding to non-profit organizations, public agencies, and tenant organizations specifically for preservation efforts directed towards below-market properties where owners may not renew the Section 8 contract. This provision would help to open up these resources for any property with an expiring contract, not just "over-market" buildings eligible for the restructuring program.

Mark-up provisions. S. 1319 responds to several criticisms voiced by advocates concerning the mark-up provisions in H.R. 1336. Given HUD’s history of inaction, the requirement that HUD offer mark-ups in certain situations represents an important change. By authorizing mark-ups that do not exceed market level, the bill also provides more flexibility than H.R. 1336, which allowed mark-ups only to 90 percent of market level. Note that these concerns have also been addressed by the revised draft H.R. 202, supra.

Nonetheless, the principal shortcoming of both S. 1319 and H.R. 202 is that they impose no obligation on project owners to accept mark-up offers. Owner choice determines the future of the property, rather than housing policy. Further, even if owners do choose to accept mark-up offers, S. 1319 sets no minimum renewal commitment from owners, apparently leaving the decision up to HUD or a negotiation, not to exceed 10 years in any case.

Enhanced vouchers. Enhanced vouchers are important as a last resort where owners opt-out even after a mark-up offer, but enhanced vouchers are not by themselves a solution to the preservation problem/9/ because they do not preserve housing.

Neither bill S. 1319 or H.R. 202 expressly addresses the issue of payment standard increases above the initial "enhanced" level, which could mean under HUD’s current practice that tenants must cover any subsequent rent increases. Another issue not made clear in either bill is an owner’s duty to participate in the voucher program at the time of opt-out for any or all tenants. Even if owner participation is required initially, tenants may be forced to leave without cause after the first lease term (probably one year), due to the recent repeal of the good cause eviction requirement for vouchers.

Finally, S. 1319 only requires that HUD make enhanced vouchers available to tenants residing in low vacancy areas, but not to all tenants who need them, such as elderly or disabled residents, or families. If the project’s rents after opt-out are higher than the payment standard, all tenants should receive anti-displacement protection, and the surrounding housing market is irrelevant to this goal. S. 1319's failure to mandate protection for the elderly and disabled may be an oversight since the bill includes an explicit finding of the special vulnerability of the elderly to displacement trauma and its potentially fatal consequences./10/

Appraisals. Owners are more likely to accept mark-up offers that accurately reflect the market values of their projects than offers based on some percentage of an area FMR that may be artificially low. Nonetheless, for all its detailed requirements, the bill only provides for appraisals at the time of contract renewal, not for subsequent market-based rent adjustments during the term of renewed contracts. Owners of projects in rapidly inflating markets, where many projects with below market rents are located, will therefore be unlikely to agree to renewal periods of any significant length since they will expect the market rate quickly to outpace the initial marked-up level. This translates into fewer properties preserved and less security for tenants.

At the same time, the required HUD appraisal clearinghouse may be particularly significant. The data gathered by the clearinghouse will likely be useful in many other areas as housing policy incorporates market notions — e.g., in the setting of flat rents for public housing units. Unfortunately, the bill includes no requirement that HUD publish for the public any of the data the clearinghouse gathers, although these data should be obtainable under the Freedom of Information Act if necessary.

Voluntary transfer or sale. Despite Congress’ clear recognition of sale or transfer as a viable preservation alternative, the voluntary transfer or sale provision of S. 1319 is poorly drafted. Procedures that encourage voluntary sale or transfer only after owners have decided not to renew expiring subsidy contracts are of no use to tenants who rely on renewal of Section 8 to guarantee the affordability of the housing, unless special provisions guarantee subsidy renewal.

In addition, recent experience has shown that a general requirement that HUD merely establish procedures will have little significant effect. When under a similar requirement in the restructuring program, HUD has done little to promote voluntary sales and transfers. Without greater specificity about the ways in which HUD is to facilitate sales and transfers and provide technical assistance to tenant organizations and nonprofits, the goal will likely remain unattainable.

One more new bill, S. 1318, also introduced July 1, 1999, would authorize HUD to make grants to states that spend their own money to preserve HUD housing for low-income use. Federal dollars would be used to leverage state and local funds, which in turn would be provided to threatened HUD properties in exchange for extending low-income use restrictions. This bi-partisan legislation, co-sponsored by Senators Jeffords, Kerry, Grams, Sarbanes, Wellstone, and Boxer, parallels similar legislation pending in the House, H.R. 425 (as revised by the just-reviewed Discussion Draft of H.R. 202, supra). However, the Jeffords-Kerry bill, S. 1318, differs from its House counterparts on several points.

S. 1318 faces a tough road to passage, with the best chance being its inclusion in the overall HUD-VA-IA appropriations bill, with details and differences between the Senate bills and H.R. 202 (also folded into the House’s appropriations bill) to be resolved in a conference committee. The Senate’s tighter budget caps, with HUD slated for funding at 90 percent of FY 99 levels, make it more difficult to find room for a new spending program, even a limited one. But other efforts, such as "emergency" designations to create more room under the caps, or a negotiation producing an end to the current budget cap/tax cut impasse, could create enough breathing room for this initiative, especially if support grows on the House side.

Eligible Uses. Owners of projects receiving grants from their state would be permitted to spend the money for acquisition costs, project rehabilitation, operating costs, or other capital expenditures./11/

Eligible Properties. The bill defines eligible projects far more broadly than earlier proposed preservation legislation. Grants could be made not only to properties subsidized by HUD under the Section 221(d)(3) BMIR and 236 programs, but also to any properties receiving project-based Section 8 assistance. Resident-owned and RHS §515 Rural Rental Housing are also permitted to receive grants. Eligibility is not further limited to just below-market properties that could prepay their loans; troubled properties needing capital renovations could also qualify.

Continued Use Restrictions. S. 1318 would require that owners of eligible projects also agree to some continued use restriction in order to receive additional funds. For Section 221(d)(3) BMIR, Section 236, and Rent Supplement properties, the owner must agree to an unconditional waiver of prepayment rights, along with low-income affordability restrictions that will last for at least 15 years after the time the project receives its grant. Eligible projects with Section 8 assistance must agree to accept Section 8 contract renewals until either 15 years after the grant or the remaining term of the mortgage,/12/ whichever is longer. Projects owned by tenants or resident-approved nonprofit organizations must agree to 15-year low-income affordability restrictions./13/ RHS Section 515 Rural Rental Assistance projects apparently would be eligible without further use restrictions.

Total Resources. A crucial question for the success of any grant program will be the amount of money actually appropriated to fund it. Rather than specify an authorized amount, S. 1318 authorizes appropriation of "such sums as may be necessary," which refers not to the total amount of state matching funds but simply defers the decision to the annual appropriations process. Thus, advocates will have to remain active in future appropriations discussions to make certain any enacted grant program has sufficient resources to preserve an important segment of the at-risk housing stock.

The Matching Formula. Although the bill has been described as a "matching grant" program, states may not receive a full match. As drafted, S. 1318 instructs HUD to distribute available funds based upon the proportion of the applying state’s need to the total need of grant recipients for that year. This amount is then capped at the amount of the calculated match--up to two federal dollars for every one state dollar spent for purposes that would be permitted by the bill itself, i.e., acquisition, rehabilitation, operating costs, and capital expenses for eligible preservation projects. State allocations of federal tax credits or mortgage revenue bond funds to preservation would also count, but only on a dollar-for-dollar basis towards the state’s match.

Unfortunately, at present the bill recognizes only expenditures of state funds, rather than local funds, although local tax-exempt bond funds would count towards the state’s contribution for the one-for-one match. In many places, cities and counties have been the most active participants in preservation. Advocates in those areas may need to push for a revision specifically recognizing their local government’s contributions, without having to rely on a state’s decision to pass through the funds.

Allocation of funds. Since there is not likely to be enough money in any given year for all potential preservation projects, S. 1318 establishes the bare bones of a system for allocating grant funds. Initial allocations would be made directly to states, under an application procedure to be designed by HUD. Once the money is in state hands, states themselves would decide how to distribute it among eligible projects, although their discretion would be guided by a set of statutory criteria.

Since S. 1318 defines the needs assessment process very broadly, ultimate allocation of these funds will mostly depend upon how HUD designs its allocation scheme. The bill directs HUD to consider both the number of units at risk for prepayment, opt-out, or otherwise at risk of being lost to the inventory of affordable housing, as well as the difficulty that residents would face in finding decent replacement housing in their local market. The challenge here will be to ensure that HUD does not choose a simple but meaningless indicator of conversion risk, such as the ratio of rent to published Fair Market Rent. Better state or local risk assessments should include factors such as equity per unit, ratio of rent to true market value, low inspection scores from HUD’s Real Estate Assessment Center (to indicate troubled properties), local voucher failure rates, or the like.

HUD’s allocation process and the matching requirement must also serve the objective of stimulating state spending. Some states with the largest needs, such as Texas and Florida, have so far spent little or no state money on preservation. Under a strictly proportional award, these states would not be able to receive much themselves (because of the match cap), and their inactivity in the face of need could also reduce the funds available to other recipients. Some smaller states might then feel that their own spending will not realize a commensurate federal match. HUD could address this problem either by managing which states receive awards in given years or by allowing each state’s matching contribution to become a factor in the scoring and ranking of applicants./14/

S. 1318 would also require significant advocacy work at the state level. Since the bill would award money to states, rather than directly to projects or even to local governments, some states will have to be pushed to apply at all. In addition, the bill would require states to take into consideration several factors in their own award decisions, including whether the assistance will be used as part of a non-profit transfer; whether the money leverages additional use restrictions beyond the required minimum; compatibility with other federally required plans; the extent to which the project meets needs not otherwise met by the local market (e.g., the need for elderly housing); and whether use of the funds would further fair housing goals. However, states may also consider such other factors as HUD or the state chooses, and in practice these decisions will probably be made mostly by state housing finance agencies (HFAs). These state HFAs may well prefer preserving federally subsidized units already in their own portfolio – certainly units in need of resources, but often units perhaps less at risk than those that are not state-financed. Advocacy will have to ensure fair targeting of state and federal resources to priority needs.

Advocacy will also be essential for ensuring that states give due consideration to where expenditures will have maximum impact. Many HFAs have preservation programs that emphasize "stay-in" incentives to owners, rather than cost relief or acquisition funding for tenant-endorsed non-profit transfers. Such stay-in incentive programs, when analyzed over the long term, may well be more expensive, and more uncertain for future affordability, than policies such as non-profit transfers that further long-term preservation. The House’s draft H.R. 202, by limiting federal grants only to non-profit transfers, instead seeks to maximize long-term affordability, and S. 1318 would benefit from stronger direction of these new funding resources.

Notes

1    NHLP is grateful for the contributions of law student interns Brian Galle and Todd Espinosa, who researched and wrote major portions of this article.

2    After the House bill was introduced, HUD did announce a limited emergency mark-up policy (later issued as Notice H 99-15 (June 16, 1999)) to address the growing opt-out problem. See HUD Finally Announces "Mark-Up" Policy to Prevent Some Section 8 Opt-Outs, 29 HOUS. L. BULL. 96 (May 1999), and HUD’s Final "Mark-Up Notice Contains Important Changes,30 HOUS. L. BULL. XXX (July/Aug. 1999).

3    See House Republicans Introduce Preservation Bill, 29 HOUS. L. BULL. 120 (June 1999), describing H.R. 1336, 106^th Cong., 1^st Sess. 1999.

4    New Preservation Proposal Introduced in Congress, 29 HOUS. L. BULL. 52 (March 1999), describing Vento-Ramstad bill, H.R. 425, 106^th Cong,. 1^st Sess. 1999.

5    Subcommittee staff inform us that this provision is intended to restrict the program to buildings transferred to nonprofits as part of the transaction that includes the matching grant. This funding eligibility criterion, which presumably will foster long-term preservation, could explain the draft’s requirement of only a five-year affordability commitment after the expiration of current federal restrictions, which also must be extended in exchange for the grant, presumably to the end of the mortgage term.

6    As is true for current enhanced voucher recipients where owners prepay their HUD-subsidized mortgages, the payment standard would be set at the actual rent for the unit, subject to the PHA’s rent reasonableness test. This amount may be higher than the local voucher payment standard. Tenants who move out of the property would receive voucher assistance under the ordinary local voucher payment standard.

7    In this the Senate bill differs from the original version of the House bill, but resembles the newer revised Discussion Draft of H.R. 202 (reviewed supra) in granting HUD wider discretion to issue enhanced vouchers.

8    42 U.S.C.A. 1437f note, Pub. L. No. 105-65, § 514(f)(3).

9    See House Republicans Introduce Preservation Bill, 29 HOUS. L. BULL. 120 (June 1999) for a detailed discussion of vouchers and preservation policy.

10    Where HUD chooses not to exercise the discretion provided, it may be compelled to provide enhanced vouchers to disabled families, which should include many elderly families, under its reasonable accommodation duties under applicable civil rights and Fair Housing laws.

11    S. 1318 does not expressly include "preservation incentives" (i.e., additional benefits given to current owners) as a permissible use of funds, but since incentives can be included within operating costs or can take the form of loans for capital expenditures, they are probably permitted under the current language.

12    An earlier discussion draft of the bill would have required both sets of commitments for eligibility, but the current version apparently requires projects that qualify in more than one way to meet only one set of use restrictions.

13    Although the intent of these requirements is clearly that owners agree to restrictions in exchange for grants, the language of the bill at present calls for the use agreements to be in effect before the grant can be awarded. This could present timing problems, where an owner or lender might not agree to a deal until the federal money is definitely in place, and the funds cannot flow until the restrictions are in place as part of the deal.

14    HUD could so interpret the bill’s proportional need language.

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