Project-based Section 8 Contracts Expiring in Fiscal Year 1999

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Directive Number: 98-34

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U.S. Department of Housing and Urban Development

H O U S I N G

Special Attention of: Notice H 98-34 (HUD)

All Community Builders Issued: October 16, 1998

All Multifamily Hub Directors Expires: October 31, 1999

All Multifamily Program Centers

Directors, All Project Managers

All Secretary's Representatives Cross References:

Contract Administrators, Owners and Managers

of Projects with Expiring Section 8 Contracts

Subject: Project-based Section 8 Contracts Expiring in Fiscal Year 1999

TABLE OF CONTENTS

PARAGRAPH PAGE

I BACKGROUND 3

II THIS NOTICE 3

III APPLICABILTY 4

IV PROTECTING SECTION 8 TENANTS 4

V OWNER'S NOTIFICATION REQUIREMENTS 4

VI HUD'S REFUSAL TO RENEW A SECTION 8 CONTRACT 6

VII USING THE TERMS "OWNER" AND "PURCHASER" ETC 6

VIII OWNER'S DISPUTE AND APPEAL OF REJECTION 7

IX COMBINING SECTION 8 CONTRACTS AND STAGES 7

X OWNER'S OPTIONS AT CONTRACT EXPIRATION 8

XI OPTION 1 - RENEW THE CONTRACT WITHOUT RESTRUCTURING 9

XII CONTRACTS RENEWED PURSUANT TO 524(a)(1) 11

XIII CONTRACTS RENEWED PURSUANT TO 524(a)(2) 12

H: Distribution: W-3-1

XIV OPTION 2 - REQUEST A RESTRUCTURING OF THE MORTGAGE AND

CONTRACT RENEWAL 13

XV OPTION 3 - OPT-OUT OF THE SECTION 8 PROGRAM 13

XVI HUD PROCESSING OF THE OWNER'S REQUEST 14

XVII FOR FURTHER INFORMATION 18

ATTACHMENTS

1 Sample Notification Reminder Letter from HUD to Owner of Section 8

contract expiration/termination (for projects that meet HQS)

2 Sample Notification Reminder Letter from HUD to Owner of Section 8

contract expiration/termination (for projects that do not meet HQS)

3 Sample Notification Letter to Tenants from Owner of Section 8

contract expiration/termination

4 Owner's Option Checklist and Worksheet

5 Overview of Conversion Procedure

6 Instructions for completing the Rent Comparability Study

7 Form HUD-92273

8 Additional guidance for budget submission (to be used with Chapter 7

of HUD Handbook 4350.1)

9 OCAF Chart

10 Flowchart

11 Comparison of Section 8 Renewal Provisions

12 Contract - HUD as Contract Administrator

13 Contract - PHA as Contract Administrator

14 ACC Renewal

I BACKGROUND:

The Multifamily Assisted Housing Reform and Affordability Act of

1997, title V of the HUD Fiscal Year 1998 Appropriations Act, Pub. L.

105-65, approved October 27, 1997 ), established new policies for the

renewal of Section 8 project-based contracts. The Act also sets forth

new rules for determining rent increases for renewed contracts and gives

HUD authority to deny renewal when Owners are in material violation of

their obligations. For some projects, the Act also transfers processing

and oversight functions from the Multifamily Hubs and Program Centers to

the new Office of Multifamily Housing Assistance Restructuring (OMHAR).

These requirements are discussed in detail in HUD's Interim Rule

for Multifamily Housing Mortgage and Housing Assistance Restructuring

Program (Mark-to-Market) and Renewal of Expiring Section 8 Project-Based

Assistance Contracts, published in the Federal Register on September 11,

1998 at 63 FR 48925.

II THIS NOTICE:

A. Defines Owners' notification responsibilities regarding:

1. Intent to Opt-out of the Section 8 program,

2. Contract expiration/termination and,

3. Rent increases for renewed contracts

B. Advises Owners of project-based Section 8 assistance projects of

what their options are regarding the renewal of contracts,

including the combination of multiple stages and/or multiple

contracts;

C. Advises Owners that if they choose Option 3 (Opt-out), they must

notify HUD 120 days prior to expiration of the contract and if they

choose Options I (Renewal without restructuring) or 2

(Restructure), they must notify HUD 90 days prior to contract

expiration;

D. Provides guidance and procedures to Owners/management agents,

contract administrators and HUD staff on renewing contracts,

E. Provides guidance on setting renewal rents and handling renewal rent

increases; and

F. Provides the requirements and procedures for Opting-out of a Section 8

project-based contract.

THE REQUIREMENTS OUTLINED IN THIS NOTICE MAY NOT BE WAIVED BY THE FIELD

OFFICE.

III APPLICABILITY:

This Notice applies to Multifamily Housing Projects with project-

based Section 8 assistance. It does not apply to Mod Rehab projects

administered by the Office of Public and Indian Housing. Until a project

has a contract or stage of a contract that is expiring, project Owners

and field staff should follow previous procedures for any rent

adjustments. When the first contract (or stage) expires, the contract

renewal procedures in this Notice will apply.

This Notice does not provide detailed instructions regarding the

Mark-to-Market Program. For detailed information on restructuring,

contact the Mark-to-Market staff at 202-708-0547. You can also access

Mark-to-Market information on the web at

http://www.hud.gov/fha/mfh/pre/premenu.html.

IV PROTECTING SECTION 8 TENANTS:

It is the Department's intention to protect tenants who are receiving

Section 8 assistance, in spite of what course of action a project Owner

takes. For example, if an Owner decides not to renew the project's

Section 8 contract or if HUD refuses to renew the contract, those tenants

currently receiving, and still eligible for Section 8 assistance, will be

given tenant-based assistance in the form of certificates or vouchers.

If there is any delay in processing the tenant-based assistance, the

Department will consider a short term renewal of the contract, on a

case-by-case basis. If an Owner has failed to comply with the Notification

requirements, the tenants' portion of the rent cannot be increased during

the Notification period.

V OWNER'S NOTIFICATION REQUIREMENTS:

Owners are required to make notifications to HUD and project tenants

related to contract expiration, termination, and rent increases under

sections 8(c)(9) and 8(c)(8) of the U.S. Housing Act of 1937. The term

"termination" means the expiration of the assistance contract or an

Owner's refusal to renew the assistance contract. Termination may also

include cessation of the contract for a material violation, as described

in Paragraph VI of this Notice. The following notifications are

required:

A. NOTIFICATION OF SECTION 8 CONTRACT EXPIRATION/TERMINATION

Provided To: HUD from project Owner

When: 180 days prior to expiration/termination of Section 8 contract

Required by: Section (8)(c)(9) of the U.S. Housing of 1937,

as amended by Section 10002 of Emergency

Supplemental Appropriations Act for FY 1997.

Attachments 1 and 2 are sample letters field staff can use to remind

Owners of their statutory Notification requirements.

B. NOTIFICATION OF SECTION 8 CONTRACT EXPIRATION/ TERMINATION

Provided To: Project tenants and HUD

When: 180 days prior to

expiration/termination of Section 8 contract

Required by: Section (8)(c)(9) of the U.S. Housing

Act of 1937, as amended by Section 10002 of

Emergency Supplemental Appropriations Act for FY

1997.

SAMPLE NOTIFICATION LETTER - SEE ATTACHMENT 3

C. NOTIFICATION OF RENT INCREASE

Provided To: Project tenants (only in cases where

the tenant's rent contribution will be increased)

When: 90 days prior to expiration of contract

Required by: Section 8(c)(8) of the U.S. Housing Act of 1937.

Project Owners that plan on restructuring are required to provide the

following Notice:

D. NOTIFICATION OF PROJECT REQUESTING RESTRUCTURING IN MARK-TO-MARKET

(and possibly opting-out of the Section 8 Program)

Provided To: Project tenants and HUD.

When: Not less than 12 months prior to refusing to

agree to renew the extension contract entered

into pursuant to 24 CFR 401.600

Required by: Section 514(d) of MAHRA

E. OWNER'S SELECTION OF OPTION AT CONTRACT EXPIRATION

Provided To: Hub or Program Center Director

*When: 120 days prior to contract expiration for

Opt-outs and 90 days prior to contract expiration

for Restructuring or Renewal

Required by: Interim Rule published September II, 1998 and this

Notice

SAMPLE FORMAT PROVIDED IN ATTACHMENT 4

*The Department recognizes that this time frame is not possible for

contracts expiring early in this fiscal year due to the delay in

publishing this Notice. Owners should provide their selection as soon as

possible.

In addition to meeting the Federal notification requirements,

project Owners must also comply with any State or local notification

requirements. Owners should check with their appropriate local

authorities to ascertain such requirements.

FAILURE TO COMPLY:

If an Owner fails to provide the relevant Notices, the Owner must

permit the tenants to remain in their units without increasing their rent

for whatever the relevant Notice period is (90 days, 180 days or 365

days).

VI HUD'S REFUSAL TO RENEW A SECTION 8 CONTRACT:

In accordance with Section 516 of MAHRA, HUD may refuse to renew a

contract if it is determined that:

(1) (A) the Owner or purchaser of the project has engaged in

material adverse financial or managerial actions or omissions with

regard to such project; or

(B) the Owner or purchaser of the project has engaged in

material adverse financial or managerial actions or

omissions with regard to other projects of such owner or

purchaser that are federally assisted or financed with a

loan from, or mortgage insured or guaranteed by, an agency

of the Federal Government;

(2) material adverse financial or managerial actions or omissions

include:

(A) materially violating any Federal, State, or local law or

regulation with regard to this project or any other

federally assisted project, after receipt of notice and an

opportunity to cure;

(B) materially breaching a contract for assistance under

Section 8 of the United States Housing Act of 1937, after

receipt of notice and an opportunity to cure;

agreement with the Secretary or a participating

administrative entity, after receipt of notice and an

opportunity to cure;

(D) repeatedly and materially violating any Federal, State, or

local law or regulation with regard to the project or any

other federally assisted project;

(E) repeatedly and materially breaching a contract for

assistance under Section 8 of the United States Housing

Act of 1937;

(F) repeatedly and materially violating any applicable

regulatory or other agreement with the Secretary or a

participating administrative entity;

(G) repeatedly failing to make mortgage payments at times when

project income was sufficient to maintain and operate the

property;

(H) materially failing to maintain the property according to

housing quality standards after receipt of notice and a

reasonable opportunity to cure; or

(I) committing any actions or omissions that would warrant

suspension or debarment by the Secretary.

(3) the Owner or purchaser of the property materially failed to

follow the procedures and requirements of after receipt of notice and an

opportunity to cure; or

(4) the poor condition of the project cannot be remedied in a cost

effective manner, as determined by HUD or the participating administrative

entity.

VII USING THE TERMS "OWNER" AND "PURCHASER" ETC.

The term "Owner", in addition to it having the same meaning as in

Section 8(f) of the

United States Housing Act of 1937, also means an

affiliate of the Owner. The term "purchaser" as used in

this subsection means any private person or entity,

including a cooperative, an agency of the Federal

Government, or a public housing agency, that, upon

purchase of the project, would have the legal right to

lease or sublease dwelling units in the project, and also

means an affiliate of the purchaser. The terms

"affiliate of the Owner" and "affiliate of the purchaser"

means any person or entity (including, but not limited

to, a general partner or managing member, or an officer

of either) that controls an Owner or purchaser, is

controlled by an Owner or purchaser, or is under common

control with the Owner or purchaser. The term "control"

means the direct or indirect power (under contract,

equity Ownership, the right to vote or determine a vote,

or otherwise) to direct the financial, legal, beneficial

or other interests of the Owner or purchaser.

VIII OWNER'S DISPUTE AND APPEAL OF REJECTION:

If HUD refuses to renew an Owner's request for contract renewal:

1. HUD will provide a notice to the Owner giving the reason(s) for

rejection.

2. The Owner has 30 calendar days to object to the basis for rejection or

cure the problems identified.

3. At the end of the 30 days, HUD will review the Owner's action, if any,

and issue a final decision.

4. Within 10 days of receiving the final decision, the Owner can

appeal the decision and request a conference to discuss the issues

with the Hub that has jurisdiction over the project.

5. A representative of the Hub will meet with the Owner at a mutually

agreeable time, but no later than 10 calendar days.

6. If additional information must be provided by the Owner, a mutually

agreeable deadline will be established.

7. Within 20 business days of receipt of the additional information,

the Hub will either terminate, modify or affirm the original

decision.

If the Owner does not appeal, the HUD determination stands.

IX COMBINING SECTION 8 CONTRACTS AND STAGES:

HUD is interested in moving towards the goal of having only one

Section 8 contract for each project. That could involve combining

multiple contracts or multiple stages. Based on the Owner's request,

multiple contracts or stages that are expiring in FY 1999 may be combined

into one contract, at the time of renewal of the first stage or contract.

Attachment 4 includes a checklist format which can be used by Owners to

request a contract renewal. The cover sheet of this format has a space

for the Owner to designate its choice regarding the combination of

multiple contracts or stages expiring in FY 1999.

Contracts and stages that expire in subsequent fiscal years cannot be

combined at this time due to budgetary constraints, unless the contracts

are combined during a restructuring.

EXAMPLE: Consider a 100 unit project that has two stages, each

consisting of 50 Section 8 units. One stage is expiring in February,

1999, and the other is expiring in June, 1999. The request for contract

renewal will be submitted in November (at least 90 days prior to) for the

February, 1999 renewal. If the Owner is interested in combining the

stages, the renewed contract will be for all 100 units. The second stage

will be terminated when it is combined with the other units. The same

thing will be done with multiple contracts for the same project.

NOTE: Any project that had its Section 8 units decreased pursuant

to a contract renewal under section 405(a) of the Balanced Budget

Downpayment Act, I (Pub. L. 104-99) will not regain those "lost" Section

8 units.

X OWNER'S OPTIONS AT CONTRACT EXPIRATION:

When a Section 8 project-based contract is expiring, the Owner has three

options:

1. To renew the contract without restructuring;

2. To request a restructuring of the mortgage and contract renewal;

3. To opt-out of the Section 8 program.

If the Owner chooses Option 3, it must notify HUD at least 120 days

prior to contract expiration. If the Owner chooses Options 1 or 2, it

must notify HUD at least 90 days prior to contract expiration.

Attachment 4 is a format which can be used by the project Owner to

specify which option it is choosing. Each Owner should provide the Cover

sheet and the relevant worksheets for the option of their choice. Each

worksheet refers to additional documentation that must be provided,

depending on the option the Owner pursues.

Regardless of the option the Owner pursues, all requests must be sent to

the Director of the Multifamily Program Center or Hub that has

jurisdiction over that project. If the request is to be processed by

OMHAR (e.g. Option 2 and some projects under Option 1), the Program

Center or Hub will forward it to them. However, in the case of a project

where there are material violations and the enforcement process has

progressed to the point that the field staff is in a position to

terminate the existing contract, or is not willing to renew the contract,

it will not routinely be forwarded to OMHAR.

The Real Estate Management System (REMS) will be used to track the

progress of the project up to, and including when it is sent to OMHAR.

Once the request is turned over to OMHAR, its tracking system will be

used to monitor the progress of the request and feed back reports to

REMS.

XI OPTION 1 - RENEW THE CONTRACT WITHOUT RESTRUCTURING

Section 524 (a) of offers most project Owners the choice of renewing

their contract under two separate provisions:

Section 524(a)(1) requires renewals at rent levels that do not

exceed comparable market rents for the market area. (See "Initial rents

at contract renewal" below for further information.) This renewal

provision can be requested by ally Owner of a project-based Section 8

project, regardless of the type of financing used for the project.

Section 524(a)(2) authorizes renewals at rent levels that are the

lesser of (i) existing rents adjusted by an Operating Cost -Adjustment

Factor (OCAF) or (ii) a level that provides income sufficient to support

a budget-based rent. This renewal provision can be selected by Owners

for only the following projects:

(A) Projects for which the primary financing or mortgage insurance

was provided by a unit of State government or a unit of general local

government (or an agency or instrumentality of either) and is not insured

under the National Housing Act;

(B) Projects for which the primary financing was provided by a unit

of State government or a unit of general local government (or an agency

or instrumentality of either) and the financing involves mortgage

insurance under the National Housing Act, such that the implementation of

a mortgage restructuring and rental assistance sufficiency plan under

this Act is in conflict with applicable law or agreements governing such

financing;

(Examples are 1lb projects that were insured)

or section 515 of the Housing Act of 1949; (includes 202/8, 515/8 - does

not include 811s)

(D) Projects that have an expiring contract under Section 8 of the

United States Housing Act of 1937 pursuant to section 441 of the Stewart

B. McKinney Homeless Assistance Act; (SRO Mod Rehab) and

(E) Projects that do not qualify as eligible multifamily housing

projects pursuant to section 512(2) of MAHRA.

(Examples of projects that are included under this category would be

(1) a project that is not insured or (2) a project that has FHA mortgage

insurance or is HUD-held with rents at or below comparable market rents

and (3) a project (pursuant to 514(h) of MAHRA) where the primary

financing or mortgage insurance for the multifamily housing project that

is covered by that expiring contract was provided by a unit of State

government or a unit of general local govern-ment (or an agency or

instrumentality of a unit of a State government or unit of general local

government).

In order for an Owner of an insured or HUD-held project to claim

eligibility under this provision, they must obtain a rent

comparability study (see Option 1 worksheet in Attachment 4).

Contracts for all projects listed under 524(a)(2) can be renewed

under either 524(a)(1) or 524(a)(2); but only projects listed in (A)

through (E) above (and determined eligible under that category) can be

renewed under 524(a)(2). All contracts will be renewed for one year

(except those short-term renewals done to cover a delay in providing

tenant-based assistance or the short term renewals pursuant to 514(c)

during the first quarter of FY 1999), unless they are forwarded to OMHAR

for restructuring and renewal, or marking down to market and renewal.

OMHAR will give the field staff guidance on the term for those renewals.

Initial rents at contract renewal:

Initial rents at contract renewal will be set pursuant to the

provision under which the contract is renewed. This Notice does not

provide for the ability to mark rents up to market.

For contracts renewed pursuant to 524(a)(1)

Initial rents will be the project's current rents. If the Owner

believes that a rent increase is needed to support project operations,

the Owner can submit a budget-based rent increase request in accordance

with Chapter 7 of HUD Handbook 4350.1 (and Attachment 8). HUD staff will

thoroughly review the request to determine the HUD-approved rents.

However, at no time can the initial renewal rents exceed the comparable

market rents.

In the case of a project with current rents that exceed comparable

market rents, if the project is eligible for the Mark-to-Market Program,

Owners can choose to enter the Mark-to-Market program for restructuring

and contract renewal or can request a renewal of the contract without

restructuring, with the rents marked down to market. If the project is

not eligible for the Mark-to-Market Program (for example, an uninsured

project), but the project's current rents are over the comparable market

rents, the Owner can choose to have the contract renewed at market rents.

For contracts renewed pursuant to 524(a)(2)

Initial rents will be the lesser of the project's current rents

adjusted by an Operating Cost Adjustment Factor (OCAF) as described below

or the budget-based rent provided in the format required by Chapter 7 of

HUD Handbook 4350.1 (and Attachment 8) and submitted with the request for

renewal. This requirement applies to all projects requesting contract

renewal pursuant to this section, regardless of whether they have ever

submitted a budget to HUD. If the project had a budget approved by HUD

(or in the case of 515/8 projects, approved by Rural Housing Service)

within the year prior to this process, a copy of that budget can be

submitted in lieu of a new budget. However, if the

project Owner feels that a rent increase is necessary and the project has

not had an increase for at least one year, a new budget-based rent

increase request can be submitted with the request for contract renewal.

Rents may be increased if the lesser of the OCAF adjusted current

rent or budget-based rent is higher than current rents. However, they

may also be decreased if the lesser of these is lower than current rents.

Contract renewal pursuant to Section 405(c) is no longer available. For

Section 236 projects with current basic rent over comparable market rent,

the project must be reviewed for restructuring under the Mark-to-Market

program to get a contract renewal.

Future rent adjustments:

After contract renewal rents have been established, future rent

adjustments at contract renewal will be determined by applying an OCAF at

the anniversary date, except that rents on contracts renewed pursuant to

524(a)(1) may never exceed comparable market rents. A proportionate

amount of any OCAF-adjustment to the rent must be applied to the reserve

for replacements.

A comparable market study is not an annual requirement, but HUD will

periodically check the OCAF-adjusted rents for 524(a)(1) renewals to

ensure that they are still at or below market rents. Further, HUD has

reserved the fight to redetermine project rents using a budget-based rent

adjustment from time-to-time at the discretion of HUD, which may require

a new comparable market rent study.

XII CONTRACTS RENEWED PURSUANT TO 524(a)(1):

Owners of projects that choose 524(a)(1) for renewal, Owners of

projects that received a 120-day renewal under 514(c) and Owners of

insured and HUD-held projects claiming eligibility under (a)(2)(E) above,

are required to provide a rent comparability study. The study, which is

an eligible project expense, must be prepared by an independent, non-

identity of interest, state certified and licensed General Appraiser, and

prepared in compliance with the Uniform Standards of Professional

Appraisal Practice (USPAP). The appraiser that is hired by the Owner to

perform this service must be certified/licensed in the state in which the

subject property is located and must be familiar with the subject

properties' immediate market. Hiring the appraiser must be an arms-

length transaction for the Owner. Instructions for completing the

appraisal assignment are included in Attachment 6.

The comparability study will be based on all Section 8 units in the

project, regardless of how many contracts or stages are being renewed at

this time. The comparability study is not required annually; therefore,

HUD staff should keep detailed records in REMS of which projects have

completed the study so they will not mistakenly require them at the next

renewal on that project. As mentioned above, however, periodic checks

will be made on OCAF-adjusted rents to ensure that they do not exceed

comparable market rents. These checks will also be recorded in REMS.

Further, HUD has reserved the right to redetermine rents through budget-

basing and possibly require a new rent comparability study.

The results of the rent comparability study play a significant role

in how the contract renewal is processed under 524(a)(1). If the study

shows that the contract rent potential of the project is greater than the

market rent potential of the comparable rents, the Owner of the project

is required to make a further decision: they can request restructuring of

the project mortgage or they can request a renewal of the contract at

rents that do not exceed comparable market rents without restructuring.

Section 401.601 of the Interim Rule discusses the circumstances

under which an above market contract on a Mark-to-Market eligible project

can be renewed without restructuring -- a determination must be made that

renewal at rents that do not exceed comparable market rents would be

sufficient to maintain both adequate debt service coverage on the HUD-

insured or HUD-held mortgage and necessary replacement reserves to ensure

the long term physical integrity of the project without restructuring.

In other words, if the current rents are decreased to the comparable

market rent level, the project will not be negatively affected.

Requests for contract renewal should always be submitted to the

Program Center or Hub, regardless of the decision made by the Owner. In

most cases, projects with contract rent potential greater than the market

rent potential of the comparables will be forwarded by the Project

Manager to the OMHAR staff who will contact the project Owner.

Projects with contract rent potential at or below the market rent

potential of the comparables will be renewed at current rent, unless a

budget-based rent increase is approved by HUD (as described in "Initial

rents at contract renewal" above).

XIII CONTRACTS RENEWED PURSUANT TO 524(a)(2)

Owners of projects that are included in one of the above categories

524(a)(2) (A) through (D) and most projects in category (E) can request

renewal under this provision. FHA-insured and HUD-held projects that

request renewal by declaring eligibility under (E) because their rents

are under comparable market rents must provide a rent comparability

study. If the study shows that the project rents are above comparable

market rents, they must be renewed under 524(a)(1) since they would not

meet the definition of (E). Contracts for all other projects not

eligible under categories (A) through (E) must be renewed under

524(a)(1).

Owners requesting renewal under 524(a)(2) are not required to submit

the rent comparability study (except for FHA-insured and HUD-held

projects with rents under comparable market rents, as noted above) unless

they received a 120-day renewal pursuant to 514(c) of . Their contract

will be renewed at rent levels that are the lesser of the current rents

adjusted by the OCAF or a level that provides income sufficient to

support a budget-based rent.

XIV OPTION 2 - REOUEST A RESTRUCTURING OF THE MORTGAGE AND

CONTRACT RENEWAL

If an Owner is interested in restructuring the mortgage, and

believes the project is eligible under the Mark-to-Market Program, it

should request a restructuring of the mortgage and contract renewal by

submitting the Attachment 4 Cover sheet and worksheet for Option 2, plus

any required documentation to the Director of the Multifamily Program

Center or Hub, at least 90 days before the contract expires but in any

event as soon as possible after receipt of this Notice for those

contracts expiring in the first quarter of FY 1999. This worksheet

includes a certification that project rents exceed comparable market

rents and neither the Owner nor any affiliate is suspended or debarred.

If the Owner or any affiliate is suspended or debarred, the project may

continue to be eligible for restructuring if the Owner proposes a

voluntary sale of the project.

XV OPTION 3 - OPT-OUT OF THE SECTION 8 PROGRAM

If an Owner chooses to opt-out of the Section 8 program, and has

satisfied the relevant Notification requirements defined above, they can

request to opt-out of the Section 8 program by providing the Cover sheet

format in Attachment 4 and the worksheet for Option 3. The request must

be sent to the Director of the Multifamily Program Center or Hub which

has jurisdiction over the project.

HUD actions:

If proper notice was provided to HUD and the project tenants, HUD

will provide tenant-based assistance to all tenants currently receiving,

and still eligible for Section 8 assistance.

The Overview of Conversion Procedure for replacing project-based

subsidy with tenant-based assistance is included as Attachment 5 of this

Notice. To ensure adequate processing time, the process of issuing

tenant-based assistance must begin 120 days prior to the expiration date

of the project-based contract. If there is a delay in the provision of

tenant-based assistance caused by HUD, the field staff can do a short-

term renewal of the contract to cover the time necessary to issue the

certificates or vouchers. It is imperative that the Project Manager

coordinate this effort with the Public & Indian Housing (PIH) staff.

In those instances where expiring project-based Section 8 is

replaced with tenant-based assistance, the tenant-based assistance shall

be administered by the local Public Housing Agency (PHA) or other

designated contract administrator (as appropriated, chosen by the PIH

staff. Additionally, the PIH staff will make the initial contact with

the PHA and serve as the PHA's primary contact with HUD for technical

assistance through the conversion process .

Owners are reminded that for 1980 and later New Construction and

Substantial Rehabilitation contracts, when the HAP contract terminates,

HUD has the contractual right to require the

designated depository to return to HUD the unused balance of funds

remaining in the residual receipts account at the time of the HAP

contract's termination. Pursuant to the contract, HUD will require the

depository to return the funds.

XVI HUD PROCESSING OF THE OWNER'S REQUEST:

Depending on the Option chosen by the Owner, their request will be

processed in accordance with the following:

HUD Processing of Option I (Contract Renewal)

The Project Manager will:

1. Log the request and relevant information in the REMS system. The

Owner should have submitted the Attachment 4 Cover sheet,

worksheet for Option 1, Method I or 2. The Owner's submission

must also include the documentation required by the applicable

worksheet. Projects that received a 120-day renewal pursuant to

514(c) of must submit a rent comparability study.

2. Review the Owner's certification regarding debarment and/or

suspension on the worksheet. If the Owner checked that they are

not debarred or suspended, verify that information by using the

www.ARNet.gov/epls/. If the Owner is debarred or suspended, but

it is necessary or desirable to have the contract renewed, the

Project Manager should contact their desk officer in the HQ

Office of Portfolio Management for further guidance. The Project

Manager should review the Owner's certification regarding the

provision of Notifications and verify that they have complied

with all Notification requirements by reviewing copies that

should be attached to the worksheet.

3. If at any time during the above or subsequent steps outlined

below, the Project Manager feels that the contract should not be

renewed (See "HUD's Refusal to Renew a Section 8 Contract"), they

should prepare a notice advising the Owner of the basis for

rejection, giving the Owner 30 days to object to the reasons or

to cure the problems identified. See "Owner's Dispute and Appeal

of Rejection" above. If the Project Manager's concern is

resolved and the contract can be renewed, or if there is no

concern, depending on the method under which the Owner has

requested the renewal, take the following steps:

For Method 1 (pursuant to 524(a)(1)):

(1) Review the rent comparability study and record it in REMS.

Make sure that the study was done in accordance with the requirements

included in Attachment 6.

When reviewing the rent comparability study, the Hub and Program

Center Directors should

take the following factors into consideration:

(a) HUD review of Owner's comparable properties. This

review should answer the question: "Are the

properties provided in the Owner's rent

comparability study valid comparables to the

subject HUD property?" In order to answer this

question, the Hub or Program Center Director should

determine if HUD is at risk if it does not field

verify the Owner's comparables. As a general

guideline, when comparable rents are 0% to 25%

above the existing Section 8 rent, the Hub or

Program Center Director may elect to field verify

the Owner's comparables. Local market conditions

should determine if this 0% to 25% guideline is

appropriate or if some other standard should be

applied.

(b) Resources available to the Director to complete its

review. Directors are encouraged to avail

themselves of whatever assistance is required to

perform a thorough review of the Owner's rent

comparability study. The primary resource

available to the Director to complete this review

is the in-house multifamily appraiser. Other

resources include: the TDC appraiser, EMAS, and

OMHAR's PAEs.

Directors should complete their review within 45

calendar days of receipt of the Owner's

comparability study or whatever period is required

to allow sufficient time for contract renewal. If

the Director is going to utilize 0 's PAE to

complete this review, the Director shall so notify

the 0 staff within 14 calendar days of receipt of

the Owner's rent comparability study.

(2) Review the study and the charts on the worksheet to verify that

the calculations provided include all Section 8 units in the project,

regardless of whether the contract or stage that is being renewed at this

time includes all of the Section 8 units.

(3) Check to see that the Owner submitted the required information.

If the charts show that the current contract rent potential of the

project is:

(a) greater than the market rent potential of the

comparable rents, the Owner should have acknowledged

that they understand that their submission will be

forwarded to OMHAR for further review and they would

like a contract renewal at rents that do not exceed

the comparable market rents, without restructuring the

mortgage. Transmit the Owner's submission to OMHAR .

If OMHAR determines that the project rents can be

reduced to comp arable market rents without having a

negative affect on the project, they will notify the

Project Manager to renew the contract, including

specifying the renewal rents and the contract term.

(b) at or below the market rent potential of the

comparable rents and the Owner is requesting a rent

increase, a budget-based rent increase request

prepared in accordance with HUD Handbook 4350.1 and

Attachment 8.

(4) If all documentation is there and appears reasonable, and the

project is eligible for a rent increase, the contract renewal rents will

be set at the HUD approved budget-based levels as long as they do not

exceed the comparable market rents. If a rent increase is not justified

at this time, the contract will be renewed at the current rent levels.

If, at any time, the reviewer determines that

the project's current rents are above comparable market rents, the

request should be forwarded to OMHAR with that information included in

the transmittal memo. OMHAR will then determine whether the project will

be restructured or if the contract can be renewed at comparable market

rents without negatively affecting the project.

(5) Prepare a contract renewal for one year. A contract form will

be sent to field staff in the near future. The Owner should have

specified on the Cover sheet whether they wanted any multiple stages or

contracts combined at this time. If you are combining, only expirations

in FY 1999 can be combined at this time.

For Method 2 (pursuant to 524(a)(2)):

(1) Check to see if the Owner is eligible to renew under this

method. They should have checked one of categories (A) through (E). For

projects declaring eligibility in categories (A) through (D), it should

be relatively easy to determine their eligibility. For projects

declaring eligibility in category (E), it is a little more difficult.

Any project that is not FHA-insured or HUD-held is clearly eligible under

(E). A project that is FHA-insured is only eligible under that category

if their project rents are at or below comparable market rents. The only

way you can determine that is to review their rent comparability study.

They are the only projects that are required to submit a rent

comparability study under this Method, except for any who received a

120-day renewal under 514(c), (whereas all project Owners requesting renewal

under Method 1 are required to submit a rent comparability study). If

your review of the rent comparability study for an insured project

requesting renewal under this Method determines that the project's rents

are over comparable market rents, the Owner's submission must be

forwarded to OMHAR for processing.

(2) Check to see that the Owner has provided all required

documentation: (a) a budget-based rent increase (or if no increase is

requested, a budget supporting the current rents) and a rent schedule

reflecting the OCAF adjusted rent. There are charts on the worksheet for

checking all of these calculations. The project's renewal rents will be

set at the lesser of the HUD-approved budget-based rents or the OCAF

adjusted rents. These rents are not subject to a rent comparability

study.

(3) Prepare a contract renewal for one year. The Owner should have

specified on the Cover sheet whether they wanted any multiple stages or

contracts combined at this time. If you are combining, only expirations

in FY 1999 can be combined at this time.

HUD Processing of Option 2 (Restructure)

The Project Manager will:

1. Log the request and relevant information in the REMS system. The

Owner should have submitted the Attachment 4 Cover sheet and

worksheet for Option 2.

2. Review the Owner's certification regarding debarment and/or

suspension on the worksheet. If the Owner checked that they are

not debarred or suspended, verify that information by using the

following Web site: www.ARNet.gov/epls/. (The OMHAR staff will make

a further determination on whether the Owner has engaged in any of

the activities described in Section 514 of MAHRA). If the Owner is

debarred or suspended and expressed their willingness to sell the

project as part of the restructuring transaction, the certification

will be acceptable.

3. Verify that the Owner did certify that the project rents are above

comparable market rents (a rent comparability study is not required

at this time, merely the Owner's certification);

IN THE CASE OF A PROJECT WHERE THERE ARE MATERIAL VIOLATIONS AND THE

ENFORCEMENT PROCESS HAS PROGRESSED TO THE POINT THAT THE FIELD STAFF IS

IN A POSITION TO TERMINATE THE EXISTING CONTRACT OR REFUSE TO RENEW THE

CONTRACT:

4a. The Project Manager should deny the request for restructuring

rather than forwarding it to OMHAR and continue the

enforcement process. See the section above which addresses the

"Owner's Dispute and Appeal of Rejection" for further guidance.

OR, FOR ALL OTHER PROJECTS:

4B. Prepare a transmittal memorandum to

OMHAR that (a) forwards the Owner's submission, (b) provides the

results of the debarred/suspended check, (c) verifies that the

Owner certified that project rents are above comparable market

rents, and (d) provides any relevant information about the project

or Owner that OMHAR might need that could affect the restructuring.

This should not be a detailed report at this time, but merely a

"heads-up" of any issues that may be of concern. The Project

Manager should be available to the OMHAR staff (or the

Participating Administrative Entity to whom the project may

be assigned) to answer any questions regarding the project. It is

not necessary for the Project Manager to retain copies of the

Owner's submission.

5. Send the transmittal memorandum and the Owner's submission to the

Director of HQ OMHAR.

6. Enter the date transmitted to OMHAR in REMS.

7. The Project Manager will renew the contract at the rents and for

the period established by OMHAR. This information must also be

recorded in REMS.

HUD Processing of Option 3 (Opt-out)

The Project Manager will:

1. Log the request and relevant information in the REMS system. The

Owner should have submitted the Attachment 4 Cover sheet and

worksheet for Option 3, including any information required by the

worksheet.

2. Verify that the Owner provided all relevant Notifications to the

project residents and HUD. Copies of these should be included with

their submission. If the Owner failed to comply with the

Notification requirements, the tenants' rent cannot be increased

for 180 days from the Notification.

3. Closely coordinate with the PIH staff and follow the Conversion

procedures included in Attachment 5.

4. If adequate time is not remaining on the existing contract to cover

the period required to obtain tenant-based subsidy, a short-term

renewal for the contract may be executed.

5. Log the provision of tenant-based assistance for the project and

the expiration/termination of the Section 8 project-based contract.

XVII FOR FURTHER TNFORMATION:

To further clarify the options available to Owners and the Section 8

renewal provisions, a flowchart and comparison chart are provided as

Attachment 10 and Attachment 11 of this Notice. Updated one-year

contracts with both HUD as the Contract Administrator and the PHA as the

Contract Administrator are included as Attachments 12 and 13,

respectively. Attachment 14 is the Annual Contributions Contract (ACC)

Renewal.

Project Owners, managers and contract administrators who have

questions regarding this Notice should contact the Project Manager at the

Multifamily Program Center or Hub which has jurisdiction over their

projects. Information is also available on the Multifamily Home Page

(http://www.hud.gov/fha/fhamf.html).

HUD staff should contact their HQ desk officer in Portfolio

Management at (202)708-3730 for further information.

Assistant Secretary for Housing - Federal Housing Commissioner

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