National Housing Law Project Housing Law Bulletin

On September 11, 1998, HUD finally published its long-awaited interim rule to implement the new Section 8 restructuring and renewal program to cover properties with project-based contracts expiring in Fiscal Year 1999, after October 1, 1998.¹ The rule takes effect on October 13, 1998. Comments are due by October 26, 1998, and may be submitted electronically on HUD's comment Webpage at http://www.hud.gov/ogc/regcom2.htm/. In addition, Congress has required that HUD hold public hearings on some of the issues addressed in this rulemaking, and HUD has scheduled three hearings for October 1, 1998, to take place in New York, Chicago, and San Francisco. The text of the rule itself can be obtained through HUDCLIPS at "www.hudclips.org" by looking in the Federal Register file. The organization of the interim rule is straightforward, with Part 401 covering restructuring and renewal for Mark-to-Market-eligible properties, and Part 402 covering renewals for other expiring Section 8 properties. Congress, with a few exceptions, has limited the Mark-to-Market-eligible universe to those projects with HUD-insured or HUD-held mortgages that have expiring project-based Section 8 contracts (or similar federal rental assistance) carrying rent levels in excess of "comparable market rents." These properties are covered by Part 401; the remainder, by Part 402.

On the whole, the interim rule provides little guidance for program participants beyond that contained in the statute itself.² HUD explains that additional detail will be forthcoming in a "Program Manual," with no specified release date.

Sometimes HUD's omission or interpretation has especially harmful implications. This article briefly reviews several instances where the position or silence of the interim rule requires immediate attention by residents and community groups seeking to ensure that the Mark to Market program fulfills its stated promise to preserve and improve affordable housing. The article does not address those issues where the regulation essentially repeats the statutory language, if that silence does not present a substantial risk to tenant and community group interests, or where the rule addresses processing issues unlikely to be of immediate importance.

The regulations' major deficiencies include the following:

• Weak framework for tenant and community participation in developing the program of Participating Administrative Entities (PAEs), in making project-specific restructuring decisions, and in monitoring owner and PAE performance;
• No solutions for properties where owners are disqualified;
• Unclear standards to govern PAEs' voucher conversion assessments;
• Imposition of unworkable or unspecified tests to impede necessary rehabilitation or to use exception rents to preserve properties;
• Lack of guaranteed tenant protections for ordinary owner "opt-outs";
• Unclear guidance for use of HUD's authority to "mark up" rents of below-market properties for preservation.

• Written comments to HUD on the interim rule;
• Working with concerned federal legislators to get support for changes; and
• Filling in gaps with PAEs and HUD as they move to develop their own rules and policies, and apply them to specific projects undergoing restructuring and renewal.

Of the deficiencies, this area is perhaps the most glaring. When Congress passed MAHRA, there was clear recognition of the importance of ensuring tenant and community input throughout the restructuring and renewal process, both in the text of the statute itself and in its legislative history. HUD's interim rule falls far short of our expectations, of the intent of many congressional supporters, and of what is absolutely essential to ensure quality investments of large sums of public resources.

The statute requires HUD to establish procedures to provide opportunities for "timely" and "effective" participation in the restructuring to tenants and other affected parties, including neighborhood residents and the local government.³ HUD's procedures must account for timely notice and appropriate access to relevant information concerning restructuring activities. Generally, HUD's procedures must also include an opportunity for interested and affected parties to provide written comments to the PAE or at meetings, which the PAE must consider. In addition, HUD's procedures must permit those parties' participation in at least the following events: the project's restructuring plan, any proposed transfer of the property, and the rental assistance assessment plan.⁴

In addition to these statutory mandates, the bipartisan legislative history strongly supports tenant participation, whether mandated by HUD or provided through PAE rules and policies.⁵

HUD's interim rule (§ 401.500) requires very little here: two notices and one meeting. The first notice announces an early stage meeting, certainly an appropriate requirement. The second notice comes at the end of the restructuring process, informing the residents and the local government that the deal is done. While HUD states that these are minimum requirements, there is little to indicate that many PAEs will be inclined to do more without a regulatory requirement, because greater participation undoubtedly requires more effort on their part.

The first notice is of an "Intent to Restructure." It is unclear who must serve this notice. The text of the rule indicates that the PAE may require the owner to give it, with HUD's permission, whereas the preamble states that the owner must give it. The notice must identify the project, the PAE contact person, the owner's Notice of Intent (NOI) to restructure, and the expiration date. It must also state how comments may be provided to the PAE on the project's physical condition, the form of subsidy, any proposed transfer, and "other matters concerning the property and its management." It must also set the date, time and place for a public meeting within the following 20 to 60 days. Public comment is apparently limited to the period prior to the meeting!

The meeting will apparently kick off the restructuring process, permitting oral or written submissions about a variety of issues relevant to the process. Unfortunately, one meeting will not suffice for the job, since it comes at the beginning of the process, prior to any knowledge of the program and the issues presented for a particular property, or the dissemination of any specific information or plans about the property itself. Soliciting definitive input at that early stage will not produce much in the way of specifics, although certainly some general problems and issues can be identified.

The second notice required of the PAE (or perhaps the owner) comes within 10 days after the Restructuring Plan is completed and approved and the Commitment is executed (or the project falls out of the process). This notice describes the Plan and Commitment, or reasons the Plan aborted. The rule requires the full Plan and Commitment to be made available during normal business hours, subject to "laws restricting access to any information" contained therein.

Pursuant to Section 401.501, these two notices must be served on (1) either each tenant or the tenant organization; (2) the CEO of the local government; (3) the director of the local PHA; and (4) others, such as neighborhood representatives, designated by HUD or the PAE. Neither individual notice to every tenant nor posting on the property is required.

The process is obviously streamlined, but hardly "timely and effective." HUD's rule misses the entire heart of the process, leaving many tenants and other community advocates with an early unfocused gripe session and a final notice with news of what was done. While some PAEs may develop better procedures than these minimums, that is not much assurance to those residing in other jurisdictions. This process is a far cry from the "residents are our primary customers" rhetoric that HUD has deployed over the past few years.

Specifically, for residents and communities, the rule contains:

• No guaranteed individual notice or posting of the owner's intent to restructure;
• No right to comment on the actual proposed restructuring plan (which apparently violates Section 514(f)(2)(A) of the law);
• No guaranteed access to relevant information used to prepare the plan (required pursuant to Section 514(f));
• No timely input on the other critical elements of a project's restructuring plan, such as owner or project eligibility, rehabilitation and management assessments, or the rental assistance assessment plan (the latter mandated by Section 514(f)(2)(C));
• No specified role in ongoing project monitoring (e.g., periodic annual physical inspections and management assessments) with the PAE or HUD administrator;
• No rights to participate in PAE selection, the development of either the Portfolio Restructuring Agreement (PRA) between HUD and the PAE or the PAE's rules and policies, or in monitoring PAE activities under the PRA;
• No participation rights where expiring contracts raise other important issues. These issues could include renewals of eligible properties without restructuring, disqualifications of eligible or ineligible properties, adjustments of rent levels for ineligible properties with below-market rents under Section 524(a)(1) or other renewals of ineligible properties.

Where eligible owners choose not to renew a contract without requesting a restructuring plan, HUD's rule requires them to provide tenants with the 180-day and 90-day notices required under current law.⁶ These same requirements currently apply to owners of properties ineligible for restructuring who choose to terminate (opt out of) Section 8. However, if an eligible owner initially requests a restructuring plan, and then later chooses not to renew the Section 8 contract, it must serve a one-year notice of contract termination under Section 514(d) of MAHRA, along with a 90-day notice of any rent increase, if required. Where eligible owners requesting restructuring fail to renew because HUD or the PAE rejects them due to disqualification, HUD states that the termination notice need only be 180 days. Unaddressed in the rule is any notice requirement where HUD or the PAE disqualifies an owner that has not requested restructuring, or where the PAE converts subsidies to tenant-based assistance as part of a restructuring plan.

Owners that fail to give the required notices may not increase the tenant share of the rent under Section 8 for at least the period of any notice not given, running from the earlier of the date of giving proper notice or contract expiration.

Owners of properties that are not eligible for restructuring who do not intend to renew an expiring contract must also provide the 180-day termination and 90-day notices of rent increase, if applicable, under Section 402.8, with the same remedies for noncompliance. HUD may prescribe the form of these notices. The rule, however, does not address the expiration notices required of those owners with expiring contracts who intend to extend, which under the same statute must be provided to HUD and tenants at least 180 days prior to expiration.

Determination of Project's Eligibility for Restructuring (§§ 401.99 and 401.410)

For projects with HUD-insured or HUD-held financing, eligibility for restructuring is primarily determined by the relationship of the project's Section 8 rents to "comparable market" rents.⁷ Thus, a key determinant of eligibility is the "comparable market" rent for the units in the property. Moreover, this figure will also effectively determine whether a project as a practical matter must undergo restructuring, in those cases where the spread between existing and market rents is large enough that the property would deteriorate or default without some debt relief.

Restructuring, with its requirements of re-underwriting, rehabilitation, tenant participation and a 30-year use restriction, offers potential preservation benefits that are unavailable to properties that are permitted simply to renew for one year (at the lesser of existing or market rents) without restructuring. Many owners of projects that are close to "market rents" may prefer just to renew without restructuring in order to avoid the effort and expense of the process, not to mention the owner contribution toward rehabilitation or the use restriction. Under the interim rule, owners will take the first steps in the eligibility process, despite the obvious self-interest of some to avoid restructuring where other options may exist, as follows.

Owners seeking a restructuring plan must notify HUD (not the PAE) at least 90 days prior to contract expiration by certifying that project rents are above-market and that neither they nor affiliates have been debarred or suspended from HUD programs. Owners that seek a renewal without a restructuring plan must submit the same certifications by the same time, in addition to a comparable market rent analysis, audited financial statement for the prior fiscal year, evaluation of the project's physical condition, and other items required by HUD or the PAE. This submission is required as well in almost all other cases where an owner is seeking a Section 8 renewal for properties ineligible for Mark to Market, except for specified exempt properties and a few others.⁸

The effect of these provisions is that most owners seeking a renewal will either submit certifications that rents are above-market (if seeking a restructuring plan), or comparable rent analyses (if seeking a renewal without restructuring). These certifications and analyses should comply with the general "market rent" standard set forth in the rule (§ 401.410, rents charged for "comparable properties" as defined in § 512(1) of the statute). The preamble indicates that the PAE should ultimately review and determine these figures, both for eligibility purposes and, later in the process, for purposes of the restructuring plan itself. The rule (§ 401.410) implies that the PAE or its contractors makes this determination, but they may push the duty off to owners. Thus, the owner may initially select itself into the program, subject to a later PAE determination that actual market rents are higher and eligibility is lost.

More problematic is the owner who wants a Section 8 contract renewal but does not want to undergo restructuring. It has two ways to seek that objective.

The first, and perhaps simplest, way is to contend that the current Section 8 rent is equal to or below market by showing higher comparables, thus making the property ineligible for restructuring. This owner would then have to seek a contract renewal (usually at existing rents plus an operating cost adjustment factor (OCAF)) under Sections 402.4 through 402.6, discussed infra.

Where such a showing is difficult because market comparables are lower, owners could pursue a second strategy of admitting to eligibility, while seeking a renewal at a reduced rent. Here, keeping the market rent estimate as high as possible might be in the owner's interest, since it might minimize tax problems from restructuring and create the potential for some modest cash flow of which the owner may get a piece. If the owner admits eligibility (rents above market) but does not want to pursue a restructuring plan, then HUD or the PAE may approve only a renewal contract after making certain findings about the adequacy of debt service coverage (and presumably the project's operating budget) at the new lower market rents. The only control that HUD or the PAE has over the decision about restructuring is the carrot of a renewal contract, which it may decline to offer if it finds that the property is eligible and the project's financial and physical condition would be compromised without some debt relief. PAEs, residents and community housing advocates must therefore focus on both the "comparable rent" and "adequacy of income" determinations. Since it is unclear whether PAEs will be adequately compensated for carefully making these important decisions, tenants and community advocates must pay special attention to these situations.

Disqualifications Due to Owner Actions or Project Conditions (§ 401.403)

Some properties may be disqualified at the outset due to the owner's inability to make the required certifications about debarment or suspension. One issue here is that the statute makes discretionary with HUD (and presumably the PAE) the decision to deny restructuring under the statutory standard, whereas HUD's rule prohibits the consideration of a restructuring plan for such an owner unless transfer of the property is proposed. This appears to be a good move, establishing a bright line for certain owners that their options are transfer or nonrenewal and foreclosure. However, without the other elements of a program in place to assure solutions from HUD and the PAE, disasters may continue if owners fail to move toward the transfer option.

After the initial certifications of the owner, the PAE must conduct an additional and ongoing evaluation of the owner and the project's eligibility under the statute's "material acts or omissions" standard⁹ while a restructuring plan is being developed. If this evaluation discloses information supporting a disqualification, then the PAE must advise HUD and (according to the preamble, but not the regulation itself) may terminate the planning process. Moreover, HUD may reject a restructuring plan for the same reasons, but it is not clear whether HUD would conduct an independent evaluation.

Both an initial or subsequent disqualification is subject to an appeal by the owner (Subpart F), but apparently not by others.

Another problem here is the breadth of a PAE's discretion to disqualify a project due to substandard conditions. The rule properly adds the additional requirement (contained in Section 516(a)(4) of MAHRA) that "the poor condition is not likely to be remedied in a cost-effective manner" through the restructuring plan. In at least two other places in the rule, however, HUD apparently creates opportunities for PAEs to flush these properties from the inventory, rather than solve their problems. First, in Section 401.451(c), HUD requires the PAE to determine (under forthcoming HUD "guidance") whether a restructuring plan with rehabilitation pursuant to a physical condition analysis is "more cost-effective in terms of federal resources" than rejection of the plan and provision of tenant-based assistance. The content of HUD's "guidance" could have a dramatic impact on whether substandard properties will be rehabilitated, and whether solutions will come from plans with the existing owner or a new purchaser. Second, in the preamble accompanying Section 401.411, HUD discusses "exception rents" (in excess of market) for properties with negative net operating income at market rents, apparently requiring the satisfaction of additional criteria in order for PAEs to approve exception rents that may be needed to preserve properties with high rehabilitation costs in low market areas.¹⁰

Another major problem is the timing of the process and the lack of responsibility for either HUD or the PAE to pursue real solutions for these properties, as explained in the next section.

Voluntary Sales of Disqualified and Other Properties
(§ 401.480)

Where properties are disqualified from a restructuring plan, the rule (§ 401.480) attempts to implement the statutory language (MAHRA § 516(e)) permitting "voluntary sales" to new owners that would execute a restructuring plan and renew the Section 8 contract, with preference to tenant organizations and tenant-endorsed community-based nonprofit and public agency purchasers. This is the only way that disqualified properties can receive a restructuring plan. In addition, owners may elect to transfer Mark-to-Market-eligible properties not subject to disqualification simply by making transfer to any HUD-approved purchaser a condition of the restructuring plan.

For disqualified owners or properties, the rule requires the owner to notify HUD or the PAE of its intent to sell or transfer the property within 30 days after the notice of disqualification is final (after any administrative appeals). The rule seeks to implement the statutory preference by prohibiting a PAE from developing a plan with any non-priority purchaser unless it determines that no qualified entities are interested or none has a feasible restructuring plan. HUD must approve the purchaser. The disqualified owner that wants the property to receive a restructuring plan through a transfer must also distribute a HUD-approved notice of sale, and must keep the PAE advised of any offers and the status of transfer negotiations.

One of the main problems here is the reliance upon owners who have been on the losing end of a discretionary disqualification decision to simultaneously pursue the steps necessary to transfer the property (within a 30-day window). The preferable alternative would be to leave that responsibility on regulatory agencies with a clear duty to develop solutions by using all available enforcement tools, and with the necessary time to do so while maintaining the eventual availability of the Section 8 subsidy. Under the rule, the disqualified owner may just do nothing and choose to face a foreclosure by HUD upon default on the existing first mortgage when the Section 8 contract expires and is not renewed. Tenants will usually receive tenant-based assistance. However, there will be no solutions for the property and the community, absent affirmative action by HUD. HUD could use its other regulatory and enforcement tools either to oust the owner from possession and encourage a transfer or to proceed to foreclose and transfer the property to responsible ownership at that sale or at a later property disposition sale. In any case, HUD should permit transfer of the Section 8 contract and restructuring, if necessary.

The rule (§ 402.7) does not address the transfer and renewal of disqualified properties that are not Mark-to-Market-eligible, despite MAHRA's legislative history that the same procedures should apply.¹¹

Form of Subsidy After Restructuring (Project-Based
vs. Tenant-Based, §§ 401.420 and 401.421)

The restructuring process itself does not resolve the question of the form of future subsidies. The statute (§ 515(c)) establishes a "safe harbor" for three kinds of properties, ensuring a project-based subsidy renewal for restructured properties that are located in tight markets, that predominantly serve the elderly and disabled, or that are owned by nonprofit cooperatives.

HUD's rule adds two clarifications to the statute. Tight markets are those where the PAE determines the "market-wide" vacancy rate to be less than 6 percent. Advocates will have to ensure that PAEs adopt appropriate guidelines to define local markets, and take necessary steps to exclude housing unavailable to tenant-based subsidy recipients (e.g., higher priced or substandard housing) from the analysis. "Predominantly" elderly or disabled means properties that have at least 50-percent occupancy by either of those types of individuals.

For any other property, the PAE must develop a Rental Assistance Assessment Plan, addressing the question of whether some or all units in the property should be converted to tenant-based assistance. The rule simply repeats the various factors enumerated in the statute, adding only that the PAE must consider the applicable Consolidated Plan under 24 C.F.R. Part 91. The rule adds no additional guidance about the meaning of the statutory factors, nor how those factors should be weighted.

Procedurally, the rule simply refers to the statute (§ 515(c)(2)), which states that the PAE must consult with the owner in developing the plan. Unfortunately, the rule fails to also mention that a different section of the statute (§ 514(f)(2)(C)) requires the PAE to consult with the tenants, neighborhood residents, and the local government regarding this plan. As noted above, the only HUD requirement related to this is the (inadequate) initial notice and meeting about the restructuring, which will rarely have sufficient information to indicate proposed actions concerning the form of subsidy, or the data on which the proposed action is based. This omission creates an unworkable process that probably violates MAHRA.

Where subsidies are converted on restructured properties, the rule (§ 401.483) properly interprets MAHRA to prohibit discrimination by project owners against tenant-based subsidy recipients in all the units in the property because of their subsidy status. This protection must be set forth in the restructuring plan.

Project Physical Conditions and Rehabilitation
(§§ 401.450 to 401.453)

The owner commences the rehabilitation needs assessment by performing an evaluation of the property's physical condition and rehabilitation needs, and providing it to the PAE as part of its initial data collection. Presumably this occurs early in the restructuring planning process. This evaluation must address at least four items, including (1) repairs required to achieve or maintain compliance with codes or Housing Quality Standards, now and over the next year; (2) capital repair or replacement items necessary for long-term compliance; (3) plans for funding these needs under the restructuring plan, including the source of owner contributions from non-project funds; and (4) estimated initial and monthly reserves for replacement deposits for a 20-year period.

In light of the obvious self-interest of some owners to minimize rehabilitation needs (due to the 20-percent owner contribution requirement), the PAE is also responsible for an independent evaluation of the rehabilitation needs, called a Physical Condition Analysis (PCA), where immediate and long-term needs must be addressed. After its independent review, the PAE must also review the accuracy of the owner's evaluation. The owner may modify its evaluation to meet the PAE's concerns. In the end, the PAE must certify the accuracy and completeness of the owner's evaluation, and may reject the plan (if HUD concurs upon notice) if this certification cannot be done. A central issue here is that HUD's rule (§ 401.451(c)) requires the PAE to determine whether a restructuring plan with rehabilitation under the PCA is "more cost-effective in terms of federal resources" than rejection of the plan and provision of tenant-based assistance. The content of HUD's forthcoming "guidance" could determine the fate of many eligible properties requiring rehabilitation.

The standard to be used for rehabilitation is "a non-luxury standard adequate for the rental market intended" at the original Section 8 approval date. The physical needs should be "those necessary to retain the project's original market position" as decent and affordable housing, recognizing any appropriate evolution of standards since then, including basic improvements necessary to rent on the unsubsidized market. HUD requires choice of the least costly rehabilitation options, considering both capital and operating costs.

Other than making rehabilitation one of the laundry list of subjects that tenants receive notice of and about which they may address in the first meeting, HUD's rule is silent about tenant participation in the process of owner and PAE rehabilitation analysis and planning.

Sources of Funds for Rehabilitation (§§ 401.460, and 401.472 to 401.474)

The first source of rehabilitation funds is project accounts, such as residual receipts, surplus cash, and reserves for replacements, that have excess balances above initial levels required under the restructuring plan.

The second source of funds for necessary rehabilitation is from the re-sizing of the first mortgage. Essentially, the first mortgage should be set at the amount supportable at market rent levels, after considering operating costs and so forth. However, where necessary rehabilitation requires more than project account balances, the preamble explains that the PAE may request that HUD make a larger claim payment on the existing first loan, thus making proceeds available from the refinancing of the first (at market-based NOI) to cover approved rehabilitation costs. HUD intends to issue guidance on this process in the Program Manual.

The third source of funds is the owner contribution, which is set at a minimum of 20 percent of the overall rehabilitation cost, and must come from non-project sources. PAEs may exempt only nonprofit cooperatives from this requirement, so other nonprofit owners may have difficulty coming up with this sum. HUD's preamble indicates that PAEs may request larger contributions for some properties.¹² It also adds that "a reasonable proportion of the owner's contribution must come from non-governmental resources," estimated at a minimum of 3 percent of the total cost of rehabilitation (which would be 15 percent of the owner's 20-percent share), with further guidance to come in the Program Manual.

Other funding sources include rehabilitation grants under Section 531 (from recaptured interest reduction payments from prepayments) or additional Section 8 budget authority provided in appropriations acts. HUD's preamble indicates that the interim rule provides sufficient authority for implementing the rehabilitation grant program for restructuring-eligible properties, in contrast to the rulemaking or NOFA procedures normally used for grantmaking. ¹³ HUD may delegate administration of these grants to PAEs. However, HUD states its intention to use a rulemaking procedure before implementing any use of Section 531 rehabilitation grants for non-restructuring properties, uses which are expressly permitted by the statute (e.g., to provide rehabilitation funds for older assisted Section 236 properties with below-market rents).

Exception Rents (§ 401.411)

The statute allows PAEs to use above-market "exception rents" in a restructuring plan for a limited number of properties where market rents would not support adequate operating expenses, even where all of the existing first mortgage is moved into a non-serviced second mortgage or written off entirely. The regulation adds little here to the statute, except that HUD's preamble adds the additional hurdles discussed above in order for PAEs to approve exception rents (in excess of market) that may be needed to preserve properties with high rehabilitation costs in low market areas.¹⁴

Monitoring and Oversight of Project Performance (§ 401.550)

Where the PAE is a qualified Section 8 contract administrator, the PAE has the duty to ensure compliance and must require the owner to execute a Use Agreement containing the Restructuring Plan. The PAE must perform periodic monitoring at least annually, including an on-site visit. HUD will play this role where the PAE is not a qualified Section 8 contract administrator.

The rule specifies no role for the tenants in this process, not even periodic consultation during the monitoring process or guaranteed enforceability rights in the Use Agreement (§ 401.408). HUD's preamble solicits additional views about effective enforcement tools, and states that the final rule will contain greater detail about how public agency PAEs must enforce the restructuring plan.

Affordability and Use Restrictions (§ 401.408)

HUD's rule recites the minimum 30-year term required of owners that restructure, who must agree to accept Section 8 contracts if offered by the government on the same terms and conditions as the initial renewal contract. PAEs may set longer terms or additional restrictions. PAEs will specify any additional enforcement rights in the Agreement (such as for tenants or local government), as well as any reporting requirements required of the owner to enable PAE monitoring.

With respect to the applicable restriction if Section 8 becomes unavailable, the rule imposes a restriction that varies depending on how many units continue to receive project-based assistance. If at least 20 percent of the units receive project-based Section 8, then the affordability restrictions applicable to that subsidy continue to apply, apparently to the entire property. If less than 20 percent of the units receive project-based assistance, then HUD will require rent and occupancy restrictions equivalent to the Low-Income Housing Tax Credit program.¹⁵ Where these restrictions impose a below-market rent at the time of restructuring, additional debt service relief may be required. In contrast, where the restructured rents are below these "restricted" levels, later on — when and if Section 8 subsidizes less than 20 percent of the units — apparently the owner gets to capture some of the benefit (although 75 percent of the cash flow first goes toward any payments due on the second mortgage, if any).

Tenant-based Assistance Where Section 8 Contracts Are Not Renewed (§ 401.602)

For restructuring-eligible properties where an expiring contract is not renewed, varying rules may apply. Where an otherwise Mark-to-Market-eligible owner opts out, HUD must provide tenant-based assistance (at regular payment standard or FMR levels applicable in the locality) to all tenants that formerly received project-based assistance at the time of expiration, if Congress has appropriated the funds. If an otherwise Mark-to-Market-eligible owner is disqualified or rejected from a restructuring plan, any low-income household residing in a project-based unit may receive ordinary tenant-based assistance. Where the assistance is converted to tenant-based after restructuring, Section 401.606 requires families receiving project-based assistance at the time of termination to receive tenant-based assistance, but at "enhanced" levels.

HUD's preamble adds that moving expenses for displaced tenants, a statutory requirement for disqualified properties, are subject to appropriations, but it is not clear whether HUD will also make moving expenses available for tenants in other conversion situations.¹⁶

Read literally, some of the eligibility dates for providing tenant-based assistance set by the regulation — the later of the expiration date or the expiration of the period of sanction imposed for an owner's failure to serve proper notice — do not square with the statute or reality. This is because successful use of tenant-based assistance often requires the assistance to be in hand several months prior to needing to use it, to account for search and lease-up time for replacement housing for displaced residents.

For properties not eligible for restructuring that are disqualified, HUD's rule (§ 402.7(c)) states only that HUD "may" provide tenant-based assistance for the eligible properties. The rule completely overlooks the provision of tenant-based assistance for opt-outs in non-Mark-to-Market properties, despite recent mandates in past appropriations acts that were repeated in Section 514(d) of MAHRA.¹⁷

Rent Increases for Below-Market Properties (§ 402.4)

By restating the statutory language of Section 524(a)(1), the rule appears to permit HUD to increase existing below-market contract rents to market levels, although no guidance is given about standards to apply in making this decision. HUD indicates that owners of these "ineligible" properties (ineligible because their rents are below market) may request to seek renewals under Section 524(a)(2), which provides renewal at the lesser of existing rents plus a cost adjustment or budget-based rents. This rule leaves ambiguous HUD's critical policy decision on increasing Section 8 rents where necessary to preserve certain properties, promoting continued uncertainty and opt-outs in the interim.

Future Updates

There are undoubtedly many other important issues buried in these rules that will surface as more advocates and policy-makers review them and begin working with them. We will provide updates as further clarifications emerge, so please contact Jim Grow in NHLP's Oakland office with any questions or comments.

¹  63 Fed. Reg. 48,925 (Sept. 11, 1998).
²  See Multifamily Assisted Housing Reform and Affordability Act of 1997, Pub. L. No. 105-65, tit. V, 111 Stat. 1344, 1384, 105th Cong., 1st Sess. (Oct. 27, 1997) (hereafter MAHRA). For background on the law and related issues, see The New Section 8 Renewal and Restructuring Program: An In-Depth Review, 27 HOUS. L. BULL. 175 (Nov. 1997); Moving Forward on Project-Based Section 8 Expiring Contracts, 27 HOUS. L. BULL. 198 (Dec. 1997) (next steps); What Might Happen to Section 8 Properties Under the New Law? 28 HOUS. L. BULL. 17 (Feb. 1998) (how to begin categorizing properties); Section 8 Renewal and Restructuring: Working at the State Level, 28 HOUS. L. BULL. 35 (Mar. 1998) (commencing state and local activities).
³  Pub. L. No. 105-65, § 514(f).
⁴  Pub. L. No. 105-65, § 514(f)(2).
⁵  In particular, see the Senate floor statements supporting maximum participation, e.g., the statement of Senator D'Amato, 143 CONG. REC. S10737 (Oct. 9, 1997), the floor colloquy between Senators Kerry, Mack and Bond at 143 CONG. REC. S10739, and the statements of Senator Kerry at 143 CONG. REC. S10744 and Senator Sarbanes at S10745.
⁶  42 U.S.C. § 1437f(c)(9) (180 days' notice of contract termination, which includes either expirations or nonrenewals ("opt-outs"); 42 U.S.C. § 1437f(c)(8) (90 days' notice of any resulting increase in the tenants' share of the rent). The failure of HUD's rule to require a one-year notice from any owner of a restructuring-eligible project apparently violates Section 514(d) of MAHRA, which requires 12 months' written notice "if an owner of a project with an expiring … contract does not agree to extend the contract.…"
⁷  Unless the property is exempt, or the property or the owner is "disqualified." Certain above-market projects are exempted from having to restructure and may generally renew at their existing rent levels because of their financing (e.g., those with public agency financing, HUD Section 202 loans, or Rural Housing Service Section 515 loans). Disqualifications are reviewed infra.
⁸  See §§ 401.99, 402.4, 402.5, and 402.6.
⁹  HUD's rule adds nothing to the statutory language of Section 516(a) of MAHRA, although it clarifies that outstanding violations of civil rights laws are also covered.
¹⁰  At 63 Fed. Reg. 48,932, HUD states that "… negative NOI projects must be determined by the PAE to be positive social assets in the community whose operating expense levels and lack of debt service capacity are not a function of bad management. They should be unique, appropriately situated, and affordable housing, with no other comparable housing available in the submarket. If they were not restructured at exception rents, the outcome would be displacement of those who would experience difficulty in finding comparable housing, such as the elderly, persons with disabilities, and large families." These criteria may make it harder for communities to convince PAEs to preserve these kinds of properties.
¹¹  The legislative history adds that the duty of HUD to develop preferential sales procedures also applies to properties rejected from renewal (i.e., below-market or non-HUD-insured properties that are ineligible for restructuring). See the floor colloquy between Senators Sarbanes, Mack and Bond which instructs HUD to use the same procedures for properties disqualified from renewal as those disqualified from restructuring, and permit these properties to retain project-based assistance if underlying problems are addressed through "creative" preservation approaches, rather than voucher conversions. 143 CONG. REC. S10738 (Oct. 9, 1997).
¹²  63 Fed. Reg 48,935.
¹³  Id.
¹⁴  See note 10, supra.
¹⁵  The Tax Credit restrictions are either at least 20 percent of the units rented to tenants at or below 50 percent of area median, at rents no more than 30 percent of 50 percent of median, or at least 40 percent of the units rented to tenants at or below 60 percent of area median, at rents no more than 30 percent of 60 percent of area median.
¹⁶  The FY 1998 Appropriations Act (Pub. L. No. 105-65) language making appropriations for the Housing Certificate Fund for renewals and replacements of expiring Section 8 subsidies provides an additional source for relocation assistance, if similar language is enacted for FY 1999.
¹⁷  HUD has apparently interpreted the 12-month notice and tenant-based assistance mandates of Section 514(d) to apply only to properties eligible for restructuring whose owners commence processing and later opt out, not to all opt-outs. While this may be logical, given its placement in the statutory section on restructuring plans, it is hard to imagine that Congress wanted to leave other opt-out tenants unprotected in FY 1999.