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Putting the squeeze on project-based Section 8

by Ethan Handelman, National Housing Conference

Those who have been following the FY 2012 HUD appropriations (see NHC’s coverage) will have seen that the project-based Section 8 account received $9.34 billion rather than the $9.42 billion dollars requested. Beyond that $80 million shortfall, Congress rescinded $200 million from the Housing Certificate Fund, which in the past has in part been used to address shortfalls in the project-based Section 8 account. That leaves a gap for FY 2012, probably of around $180 million, based on the appropriations shortfall plus the portion of rescinded funds that could have been used. Then add an uncertainty factor, since the renewal figure is an estimate that can change based on how many contracts renew, what rent levels are, and how much tenants are able to pay.

So what is HUD doing to address the shortfall? To their credit, they have stood firmly behind the pledge to fully fund all project-based Section 8 contract renewals. That means, however, they have to find the extra money. In a recent memo and in a meeting with NHC and other members of the Preservation Working Group, HUD outlined several painful changes:

  • Redirecting residual receipts. HUD has said it will require certain restricted project funds to be used to pay Section 8 HAP payments rather than remain for project use. Some types of Section 8 contracts have a cap on how much project cash flow can be distributed to the owner each year. Amounts earned above that cap get deposited in a residual receipts account, access to which HUD controls. In the later vintage contracts, so-called “new-reg” contracts, contracts provide HUD with explicit control of these funds. Historically, residual receipts have been kept in reserve to preserve affordability at the property, for instance by funding capital needs shortfalls. Redirecting them to pay rents will quickly deplete the reserves—expect real push-back from owners on this one.
  • Limiting rent increases on exception projects. Most Section 8 rents roughly track market rents, thanks to the renewal process created in the MAHRA Act in the late 1990s. There are some exceptions (called with much originality “Exception Projects”) that can renew at above-market rents with increases based on the operating costs of the property. HUD has said it will limit those projects to formula-based Operating Cost Adjustment Factor increases if rents are already above market. This may create serious challenges for properties with operating costs rising faster than the formula rent increases.
  • Scrutiny of rent comparability studies that exceed a new benchmark. When project-based Section 8 contracts renew, rents can be reset to market levels using a rent comparability study that looks at rents for similar apartments in the non-HUD subsidized market. HUD plans to issue guidance for these renewals requiring extra scrutiny of comparable rents that are more than 110% of the new Small Area Fair Market Rent. Not only is this a new requirement, but it relies on a new standard, the Small Area FMR, which has thus far only been a pilot. While careful underwriting of rents is a generally a good feature, HUD should be careful that the 110% benchmark does not become a de facto cap on rents (a real danger when guidance from HUD headquarters translates into field office practice).

These are understandable reactions to a constrained funding environment. Expect to see push back on some of these policy changes once details are announced, especially if or when they place existing affordable housing properties at risk.

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