HUD Issues 2023 Operating Cost Adjustment Factors

HUD recently published a notice in the Federal Register establishing operating cost adjustment factors (OCAFs) for eligible multifamily housing properties. OCAFs are used to adjust the rent to current market conditions on eligible multifamily housing projects with project-based contracts issued under Section 8 of the United States Housing Act of 1937 and renewed under the Multifamily Assisted Housing Reform and Affordability Action of 1997 (MAHRA). OCAFs are also used to adjust the rents of project-based voucher (PBV) and project-based rental assistance (PBRA) properties that have gone through the Rental Assistance Demonstration (RAD) program. The 2023 OCAFs can be applied to eligible projects with a contract anniversary date on or after Feb. 11, 2023.

Significant Increases to OCAFs

OCAFs are calculated to the state and territory level with the appropriate OCAF applied to the portion of rent attributable to operating expenses not including debt service based on the location of the property. For 2023, the OCAFs range from 4.8 percent in South Dakota to 8.3 percent in Maine with a national average of 6.1 percent. The 2023 OCAFs are a significant increase over the 2022 OCAFs (ranging from 1.8 percent to 3.5 percent and a national average of 3.1 percent) and shows the impact of high inflation across the country.

Calculation Changes to Better Reflect Inflation

OCAFs are determined using nine cost components—electricity, fuel oil, natural gas, employee benefits, employee wages, goods/supplies/equipment, insurance, property tax, and water/sewer/trash—and generally look at year-over-year changes in each of the cost components with data being pulled in May of each year.

For 2023 OCAFs, HUD proposed to change the calculation method and data used to better account for high inflation and sharp increases to property insurance costs. For the 2023 OCAFs, HUD used the latest available data that resulted in a comparison of a time period more than a year for some cost components. For example, the water/sewer/trash cost component compared the May 2021 data to July 2022 data, a 14-month comparison rather than 12-month.

Accounting for inflation. The expanded data set allowed HUD to catch the additional impact of increased inflation on many of the cost components resulting in OCAFs that more closely represent the current market conditions. However, going forward, beginning with 2024 OCAFs, HUD will pull data in August of each year so the OCAFs can be released closer to the data pull, resulting in more accurate OCAFs.

Data source for insurance. HUD made one additional change that impacted the 2023 OCAFs: the data source for the insurance cost component. Rather than using the Bureau of Labor Statistics, Consumer Price Index, Tenants and Household Insurance Index, HUD switched to the Bureau of Labor Statistics, Producer Price Index, Direct Property and Casualty Insurers-Commercial Multiple Peril Insurance Series. HUD states that the new data source provides a better metric for the insurance cost of leased rental housing properties.

Auto OCAF

Some contracts are eligible for an Auto OCAF. The Auto OCAF Rent Increase process eliminates the requirement for the owner to calculate its own OCAF rent increase and submit an OCAF Worksheet and a cover letter to the contract administrator during Amend Rents years to obtain an OCAF rent increase. Contract renewals and certain contracts that aren’t eligible to receive an automatic OCAF annually won’t be a part of this automated process.

If your site is eligible for an Auto OCAF rent increase, you should receive a rent adjustment reminder letter approximately 180 days prior to the contract anniversary date. If you intend to choose the OCAF rent adjustment, you should be processing the utility analysis (if applicable) and/or rent comparability study (if applicable). Then, approximately 150 days before the contract anniversary date, the contract administrator will send a letter advising you of your site’s new OCAF increased rents, a new revised rent schedule (Exhibit A), and a request that you certify the accuracy of the debt service and non-Section 8 rent potential amounts used.

Once you’ve accepted the Auto OCAF rent increase, you’ll need to execute one Form HUD-92458 Rent Schedule and return it to the contract administrator with your signed certification within 10 days. If your contract allows for budget-based rent adjustments, you’ll be offered the option to submit a budget-based request instead of returning the Auto OCAF to the contract administrator.

Once you receive the executed HUD-92458 Rent Schedules, you can complete your Gross Rent Change through TRACS. The entire process should be easily completed in time to implement the new rents by your site’s contract anniversary date.

Sites Not Eligible for Auto OCAF

For a site not eligible for the Auto OCAF, it’s up to you to make sure you get your annual rent increase and keep your assistance payments coming on time. To do this, you must submit an OCAF rent adjustment worksheet to HUD or your contract administrator at least 120 days before the anniversary of the renewal date on your contract. If you don’t do this a full 120 days before the anniversary date, you won’t get the rent increase on time.

Sites that aren’t eligible for Auto OCAF must submit the OCAF Rent Adjustment Worksheet (HUD Form 9625), utility allowance analysis (if applicable), and a mortgage statement showing current debt service to obtain an annual rent increase.

Some sites have multi-year renewal contracts that let them choose to get budget-based rent increases instead of OCAF rent increases. If your contract gives you the option of getting budget-based rent increases, and you decide to choose that type of increase instead of an OCAF rent increase, follow the procedures spelled out in Section 2-15 of the Section 8 Renewal Guide.