HUD Issues Revised Section 8 Renewal Policy Guidebook

In August, HUD issued the long-awaited update to the Section 8 Renewal Policy Guidebook. This document applies to project-based Section 8 contracts, referred to as HAPs or PBRA contracts, and is important in establishing rents for the bulk of the existing subsidized housing portfolio. The last full guide was issued in 2008.

This update is the result of over a year of consideration of public comments on the draft published in February 2014. The updated guidebook goes into effect on Nov. 5, 2015, meaning the guide will apply to renewals and amend rent packages received by HUD on Nov. 5, 2015, or later.

Many of the changes will affect how Section 8 contracts are administered, how rents are raised, and the rules around the use of the Rent Comparability Study (RCS). Owners with HAP or PBRA contracts use the guide to request or receive annual rent adjustments; mark the rents up to market or up to budget; and renew contracts for up to 20 years.

The transmittal, the first 11 pages of the document, provides a summary of highlights of 125 changes as noted by HUD. And the 221-page fully revised guide, in large part, incorporates a number of changes that have occurred in recent years as page changes or policy clarifications.

The body of the guidebook contains asterisks to indicate where specific text has been revised. Chapter 2 (Section 8 Renewals) and Chapter 16 (Old Regulation State Housing Finance Agency Projects—Owner Options upon Full Prepayment of Original, Permanent Financing) have been completely revised.

If you’d like to review a complete copy of the guide, it can be found at the following link: http://portal.hud.gov/hudportal/documents/huddoc?id=Section8_Renewal_Guide.pdf.

Six Renewal Options

At the time of renewal, an owner must choose among any of six renewal options for which the site is eligible. With the revised guidebook, the original six renewal categories remain:

• Mark Up to Market (MU2M)—Option 1
• Mark Up to Budget, Budget Based or OCAF (MU2B)—Option 2
• Mark (down) to Market (M2M), Referral to Recap or Lite Rent Reduction—Option 3
• Exempt from Mark to Market, Exception Projects—Option 4
• Preservation Projects (ELIPHA or LIHPRHA)—Option 5
• Opt Out—Option 6

Summary of Substantive Changes

The following summary highlights some of the substantive changes reflected in the revised guide. It’s not a complete list of the substantive changes, but some of the items listed below may be of interest.

Confirmation of market rents. One of the major changes in the new guide is that HUD will now rely upon the owner’s rent comparability study for Mark up to Market renewal applications, as long as rents don’t exceed 140 percent of the Median Gross Rent by Zip Code tabulation area. Previously, HUD needed to contract with a third-party appraiser. If the owner’s RCS rents don’t exceed 140 percent of the median gross rents, the rents will be set at the RCS rents. The median rent figures for the 140 percent threshold test are identified on HUD’s website.

MAP appraisal in lieu of HUD RCS. The guide allows HUD to use the lender-ordered MAP appraisal to serve as a substitute for the HUD-required RCS if the project involves new FHA-insured financing. Under HUD’s prior guidance, this action required a waiver from HUD.

After-rehab rents for for-profit owners. The guide permits for-profit owners to obtain renewals under Chapter 15 (Section 8 Preservation Efforts), the chapter that permits rent increases under Option 1 (Mark Up-To-Market) and Option 2 (OCAF or Budget-Based) at “after rehab” rent levels. Under HUD’s prior guidance, this action required a waiver from HUD.

Special Chapter 15 rules for for-profit owners. The guide indicates that for-profit owners can use Chapter 15 to mark up the rents to budget or to market for the purpose of a transfer or for capital repairs. For-profit owners must renew under Option 2 for purposes of capital repairs, but must use Option 1 if seeking a transfer or a transfer with capital repairs.

After-rehab rents prior to rehab. The guide states that in the context of a HAP contract renewal and refinancing, if the new financing will require full debt service at closing (such as for Fannie Mae or Freddie Mac Mod Rehab Programs, or the FHA 223(f) program), HUD can allow the “after-rehab” Chapter 15 rents to go into effect at the initial loan closing. In other words, the rents can go into effect before rehabilitation has even begun. Under HUD’s prior guidance, this action required a waiver from HUD.

No LIHTC/use-restricted cap on Chapter 15 contract rents. According to the guide, for Chapter 15 renewals, HUD won’t lower the comparable market rents in the RCS to reflect any use restriction on the allowable rent levels such as low-income housing tax credit (LIHTC)-restricted rents. Under HUD’s prior guidance, this action required a waiver from HUD.

Increased distributions to nonprofit and for-profit owners. HUD’s “Explanation of Changes” to the guide indicates that both for-profit and nonprofit owners renewing under Option 2 (OCAF or budget-based rent increases) can access increased distributions if they renew for 20 years. Under HUD’s prior guidance, nonprofit owners had to obtain a waiver from HUD.

Davis-Bacon wages. The guide expressly recognizes that rehabilitation undertaken in connection with a renewal under Chapter 15 does not, in and of itself, trigger Davis-Bacon wage rates. But it notes that certain FHA financing will impose such wage rates. This affirms HUD’s longstanding position, particularly in light of recent HUD guidance indicating that Davis-Bacon wage rates apply to rehabilitation undertaken in connection with Section 8 Project-Based Voucher contracts.

HUD’s refusal to renew. The guide lays out the procedures HUD will follow—such as notice to owner and tenants, owners’ appeal rights, and short-term renewals—if HUD refuses to renew an expiring HAP contract due to a project’s poor condition or the owner’s or agent’s wrongful conduct.

Early termination of HAP contracts. The guide expressly permits the “early termination” of pre-Multifamily Assisted Housing Reform and Affordability Act of 1997 (pre-MAHRA) HAP contracts to allow for 20-year renewals under various renewal options. It also indicates that both pre-MAHRA HAP contracts and most MAHRA contracts can be terminated early to participate in Chapter 15 renewals.

Requirement for new RCS. The guide generally requires a new RCS if an owner is seeking to (1) terminate a HAP contract early and renew under the same or a different option; or (2) renew an expiring contract for more than five years.

Budget-based rent increases. The guide clarifies and modifies HUD’s rules for computing budget-based rent increases, and expressly recognizes that certain fees relating to LIHTC transactions may be included in such increases.

“Old reg” state agency HAP contracts. The guide adds a new Chapter 16 that identifies the renewal options available to owners of projects with “old reg” state agency HAP contracts. According to HUD, but for the renewal options available under Chapter 16, these HAP contracts would automatically terminate upon prepayment of the related state agency financing.