National Housing Law Project Section 8 Housing

Subject: Memorandum Re SB 1098 and Rent Control Jurisdictions

Date: June 6, 2001

SB 1098 contains special provisions that are applicable to tenants with the Section 8 tenant-based assistance who are residing in rent control jurisdictions.

I.  Statutory Background

1.  90-day notice

In rent control jurisdictions as in non rent control jurisdictions, owners with Section 8 tenant-based contracts must provide the Section 8 tenant with a 90-day notice if the owner terminates or fails to renew a Section 8 contract. Civil Code section 1954.535. For a discussion of the applicability of section 1954.535 to Section 8 tenant-based contracts, see the attached memorandum from NHLP dated May 4, 2001

2.  Vacancy decontrol and the establishment of initial rents

In a rent control jurisdiction, an owner who fails to renew a Section 8 contract in effect as of January 2000, may not establish an initial rent or any subsequent rents for the unit for a period of three years./1/ If, during the three-year period, a new tenancy is created, the initial rent must be set at the rental rate provided for in the Section 8 contract plus any increases authorized after the termination of the Section 8 contract./2/ (The rent control for the unit continues beyond the three years, subject only to the vacancy decontrol provisions of the Costa-Hawkins Rental Housing Act./3/) Thus under the Act, an owner who previously rented a unit under the Section 8 program may not claim the benefits of vacancy decontrol, if the unit is re rented within three years after a non renewal or termination of a Section 8 contract. In addition if the tenant does not move as a result of the non renewal or termination of the Section 8, the rent for the unit may be reduced below the Section 8 contract rent because the owner may not establish the initial rent. This reduction in rent will occur if the locally controlled rent for the unit is less than the Section 8 rent.

With one exception, the provision limiting an owner’s ability to establish new initial rents is not applicable to a new tenancy of 12 months or more entered into after January 2000. The exception applies if the prior vacancy for the unit was created because of a non renewal or termination of a tenant-based Section 8 contract. Under that circumstance, all the provisions regarding the ongoing control of rents continue to apply./4/ In other words, the unit remains under rent control even if a second vacancy would qualify the unit for vacancy decontrol, if the first vacancy was created because of a non renewal or termination of a tenant-based Section 8 contract.

The legislative history of section 1954.535 explains that the purpose of the legislation is to close a loophole in the Costa-Hawkins Rental Housing Act./5/ That act allows landlords to establish a new initial rent whenever a tenant voluntarily vacates a rent control unit. Prior to the passage of SB 1098, if an owner terminated a Section 8 tenant-based contract and the tenant moved because he or she could no longer afford the unsubsidized rent, the resulting vacancy was considered a "voluntary vacancy" that allowed the landlord to establish a new rental rate for the unit. Because decontrolled rents are often greater than Section 8 rents, significant numbers of Section 8 owners had an incentive to terminate, and actually terminated, their Section 8 contracts to take advantage of this loophole./6/ The legislature enacted SB 1098 with the understanding that "a rental unit is not ‘decontrolled’ if it is vacated when . . . [t ]he landlord no longer accepts Section 8 housing payments and the tenancy is terminated because the tenant could not pay the rent without Section 8 assistance. . . ."/7/

II.  Other related notice requirements of the Section 8 Program

1. Notice for a rent increase.

   To increase tenant rent, an owner must provide the PHA with a 60-day notice./8/ The tenant lease and the Section 8 Housing Assistance Payment (HAP) contract establish an initial rent and that rent cannot be increased until after the initial term./9/
   

2. Notice for Conversions from Certificate Program to Voucher Program.

PHAs must terminate program assistance under a Certificate Section 8 Housing Assistance Payment (HAP) contract at the effective date of the second regular reexamination of the family on or after October 1, 1999. /10/ The last "second reexaminations"for any family will occur in September 2001. The regulations require PHAs to provide a 120-day written notice to both the owner and the family of the termination and offer the family continued assistance under the voucher program. /11/

In such a situation when there is a conversion from a certificate to voucher, HUD takes the position that the PHA may not make HAP payments to the owner after the termination of the Section 8 Certificate program. Thus when there is a conversion, the payments to the owner stop when the Section 8 Certificate program terminates. Absent a court order, the only way that the payments may resume is if the owner signs a new voucher contract.

III.   Advocacy Tips to Encourage Section 8 Owners to Remain in the Section 8 Program

1. Lack of "vacancy decontrol" may convince landlord to remain in the Section 8 program

   In rent control jurisdictions, the unavailability of "vacancy decontrol" may convince an owner to remain in the Section 8 program. Therefore, tenant-based Section 8 owners in rent control jurisdictions with units subject to rent control should be informed of the change in the vacancy decontrol provisions of section 1954.535. They may decide that it is not in their interest to get out of the Section 8 program if they understand that they cannot take advantage of vacancy decontrol and establish an initial rent for a new tenant and that they also may be subject to a rent

   reduction if the Section 8 tenant remains in the unit after the Section 8 contract is terminated or not renewed.

2. Local rent control boards may act to keep Section 8 landlords in the program

Advocates should consider working with local rent control boards and PHAs to induce Section 8 owners to remain in the program. In Los Angeles, housing advocates and the Housing Authority of Los Angeles agreed to support an array of proposals submitted to the rent control board to encourage Section 8 owners to stay in the program. These proposals would:

• allow an owner with below market rents to take advantage of rent increases up to the maximum levels of the Los Angeles Rent Stabilization Ordinance (LARSO);

• allow an owner to increase rents to a level up to 120 percent of FMR (This provision will primarily benefit families who have a member who is disabled);/12/ and

• allow an owner to increase the security deposit for tenants who remain in place (To increase the security deposit the owner must offer a phased-in payment plan).

The rent control provisions of SB 1098 are directed at tenants who are renting units in place with tenant-based Section 8 contracts. For these tenants there are two elements of the Section 8 program that influence the amount of rent that a tenant may pay. First the PHA must determine if the rent charged by the owner is reasonable. The PHA will make this determination at anytime that the owner increases the rent and may decline to approve the new lease if it determines that the rent is not reasonable./13/ Second, the value of the payment standard influences the amount of rent that the tenant pays. The rent subsidy is set at the difference between the payment standard and, in most cases, 30 percent of the family’s income./14/ If the rent for the unit exceeds the value of the payment standard, the tenant pays the difference.

Therefore, if the rent for the unit exceeds the payment standard, the family will pay more than 30 percent of income for rent.

In both rent control and non rent control jurisdictions, an owner is likely to stay in the Section 8 program whenever the payment standard exceeds, respectively, the controlled or market rent. Therefore, an increase in the payment standard coupled with the PHA’s approval of the lease at the payment standard, and, in rent control jurisdictions, permission by the rent control board to increase the rent to the payment standard is likely to discourage owners from exiting the program. Additionally, if the landlord is concerned about whether the tenant can continue to pay the rent and the tenant is paying more than 30 percent of income for rent because the rent for the unit exceeds the payment standard, an increase in the payment standard reduces the tenant’s rent burden and may keep the landlord in the program because the landlord believes that it is more likely that the tenant will not default on the rent.

PHAs have the authority to set the payment standard at 90 to 110 percent of the FMR./15/ For increases in the payment standard beyond 110 percent, PHAs must request approval from HUD, which may grant requests to increase the payment standard up to 120 percent of the FMR./16/ In addition, as a reasonable accommodation, HUD may also approve an increase in the payment standard up to 120 percent of the FMR for an individual who is disabled./17/

The payment standard is based upon the FMR, so an increase in the FMR most likely will result in an increase in the payment standard. Several California PHAs have requested and received an increase in the FMR. For example, San Francisco received approval for an FMR increase of 150 percent while Santa Monica (CA) received approval for an increase to 180 percent of FMR. In other jurisdictions, HUD increased the FMR by increasing the percentile of area median rents upon which the FMR is based. For 39 metropolitan statistical areas (MSA), including six in California,/18/ HUD recently increased the FMR by basing the FMR rent calculation on the 50^th percentile of area median rents instead of the 40^th percentile as is usually the case./19/ PHAs that were not included in the 39 jurisdictions may seek to have their FMR calculations based upon the 50^th percentile./20/ It should be noted that an increase in the FMR does not preclude a PHA from also increasing the payment standard to 110 percent of the FMR or seeking HUD approval to increase the payment standard to 120 percent.

As noted earlier, owners in rent control jurisdictions whom either failed to renew or terminated Section 8 contracts may not establish an initial rent and must use the Section 8 rent as the initial rent for the unit if it is re rented. To help enforce this provision, PHA’s should be encouraged to compile a list of the units that are subject to the limitation and should be urged to make such a list available to the local rent control board. The rent control boards should then make the list available to tenants and owners.

Footnotes:

1. Cal. Civil Code Section 1954.53(a)(1)(A) (West Supp. 2000). If the owner cannot establish the "initial rent," it means that the unit is still subject to rent control.
2. Id.
3. California Civil Code Section 1954.50-1954.535 was originally enacted in 1995. Generally, it preempts local rent control ordinances that limited the rent that a landlord can charge to a new tenant after the unit has been vacated voluntarily.
4. Id. An argument could be made that a new Section 8 tenancy of less than 12 months formed after January 1, 2000 is subject to the statutory provisions regarding the establishment of initial rents and nonrenewal and termination of Section 8.
5. Assembly Committee on Judiciary, SB 1098, amended July 13, 1999, at 4-5.
6. Id. See also Senate Judiciary Committee, SB 1098, amended April 13, 1999, at 4-5 (Section 8 owners are advised to terminate Section 8 contracts as "rents in the future will in general not be generous as compared to vacancy decontrolled rents").
7. Assembly Committee on Appropriations, Policy Committee, SB 1098, amended July 8, 1999, date of hearing August 18, 1999, at 1, see also Senate Rules Committee, Office of Senate Floor Analysis, Unfinished Business, SB 1098, August 31, 1999, at 3.
8. 24 C.F.R. § 982.309(g)(4) (2000).
9. Housing Assistance Payments Contract (HAP Contract) Section 8 Tenant-Based Assistance Housing Choice Voucher Program, HUD-52641 (3/2000)
10. 24 C.F.R. § 982.502(d) (2000).
11. Id.
12. 24 C.F.R. § 982.503(c)(ii) (2000). It is anticipated that the Housing Authority of Los Angeles will seek HUD approval to increase the payment standard to 120 percent of the FMR. In general, PHAs have the discretion to set the payment standard at any level between 90 and 110 percent of the published fair market rent (FMR). Id. at 982.503(b). This range is called the basic range. HUD may approve a payment standard between 110 and 120 percent of the FMR. Id. at 982.503(c)(3). This range is called the "exception" range.
13. 24 C.F.R. § 982.507 (2000).
14. Tenant rent is set at the higher of 30 percent of adjusted income, 10 percent of gross income or the welfare rent. 24 C.F.R. § 5.628 (2000); see also 42 U.S.C. § 1437a(a)(1)(A-C) (West 1994). Tenants may also be subject to a minimum rent. 24 C.F.R. § 5.630 (2000); see also 42 U.S.C. § 1437a(a)(3) (West Supp. 2000).
15. PHAs have the discretion to set the payment standard at any level between 90 and 110 percent of the published FMR. 24 C.F.R. § 982.503(b) (2000). The regulations do not impose any specific criteria for the PHA to apply before exercising its discretion.
16. Id. at § 982.503(c) which sets for the various standards that HUD must apply to increase the payment standard up to 120 percent of the FMR.
17. Id. at § 982.503(c)(2)(ii).
18. Oakland, Orange County, Sacramento, San Diego, San Jose and Ventura County.
19. HUD Announces That it Will Raise Section 8 Fair Market Rent Levels in Thirty-nine Metropolitan Areas, 30 HOUS. L. BULL. 135 (Sept. 2000); Interim Rule on Increased Fair Market Rents and Higher Payment Standards for Certain Areas, 65 Fed. Reg. 58,869 (Oct. 2, 2000); 50th Percentile and 40th Percentile FMRs for Fiscal Year 2001; Final Rule, 66 Federal Register 161 (Jan. 2, 2001).
20. Interim Rule on Increased Fair Market Rents and Higher Payment Standards for Certain Areas, 65 Fed. Reg. 58,869 (Oct. 2, 2000).