New Rules in Effect for Section 8 Rent Comparability Studies
HUD’s Office of Multifamily Housing Programs recently published updated guidance for owners of sites taking part in its Section 8 Project-Based Rental Assistance (PBRA) program. The last update to the Section 8 Renewal Guidebook was in 2017. This recent update is centered around HUD’s standards for preparing, submitting, and reviewing Rent Comparability Studies (RCS) used to establish contract rents.
Specifically, HUD made substantive changes to Chapter 9 of the guidebook. This chapter details the requirements for any RCS, whether submitted as part of a request for renewal of a project-based Section 8 housing assistance payment (HAP) contract or as part of a five-year comparability adjustment under a long-term Option 1 or Option 2 contract. These new requirements became effective for any renewal and rent adjustment submission made on or after May 1, 2023.
We’ll summarize the key highlights of the update and cover how the changes will affect owners and managers of sites assisted by HAP contracts.
As a requirement for renewal, most owners with expiring Section 8 project-based contracts must submit an RCS at initial renewal to demonstrate that current rents are at or below comparable “market” rents. An RCS is used in determining the comparable market rents for each unit type covered under a HAP contract. Beginning with the date of the initial renewal of the expiring Section 8 project-based contract, the RCS starts a maximum five-year “life cycle,” after which a new RCS is required.
To prepare an RCS, an appraiser analyzes the site, identifies comparable properties, and determines the rents paid at such properties. The appraiser then makes adjustments to these rents based on differences between the comparable properties and the subject property to arrive at estimated market rents.
What qualifies as a comp? HUD requires that comps resemble your site’s units in a number of ways, including:
- The market area where the site is located, considering rent levels, housing prices, job opportunities, and other relevant economic indicators;
- Neighborhood conditions, which include crime rates and accessibility to services, employment, transportation, etc.;
- The site’s age, physical condition, and overall appeal;
- The type of structure (such as townhouses, elevator building, or walk-up apartment);
- The unit size and mix;
- The amenities (such as floor coverings, washer-dryer, or microwave);
- The number of bedrooms and bathrooms;
- Utilities (type and whether paid by the owner or resident);
- Amenities and non-shelter services similar to those available at the site but not beyond those available at the site, taking into account if those services are included in the rent or incidental.
The chosen comparable units also must not be rent restricted or rent controlled by a federal, state, local, or other public program. Using these and other factors, the appraiser decides how the comps measure up against your site and what your rent should be.
After determining the adjusted rent for five comps, the appraiser uses these adjusted rents to determine the estimated market rent for your site’s units. RCS appraisers must provide a concise but professionally complete explanation as to why each adjustment was made and how the dollar value was derived. HUD needs to see and understand how the appraiser reached his conclusions about the estimated market rent for your site’s units.
If your appraiser makes mistakes in the RCS, his conclusions could be wrong. This, in turn, could lead to a time-consuming HUD or contract administrator review of your rent increase request.
Mandatory Market Rent Threshold
For some renewal requests, HUD requires review of a third-party RCS commissioned by the owner/agent and a third-party RCS commissioned by HUD. Previously, HUD required a HUD-commissioned RCS when the requested rent for the subject property’s median unit exceeded 140 percent of the Median Gross Rent by ZIP Code Tabulation Area (GRZCTA) for the property’s ZIP code.
HUD has replaced this threshold test with the latest update. Now, a HUD-commissioned independent RCS will be ordered only if a requested gross rent exceeds the hypothetical gross rent if all units were rented at 150 percent of the Small Area Fair Market Rent (SAFMR).
Under this new test, the comparison no longer focuses on the site’s median unit; instead, the comparison takes into account the site’s full unit mix. As a result, you may expect that some sites with smaller bedroom sizes, such as elderly properties with studios and/or one-bedroom units, may be subject to the third-party RCS requirement when they were not previously. Conversely, some sites with larger bedroom sizes may not be subject to a third-party RCS when historically they were.
Expanded RCS Alternatives
The latest update revises the options available for owners looking to renew their contracts without a rent comparability study, when eligible, to reduce administrative and processing costs and time for owners. Specifically, HUD revises the option to renew some HAP contracts without an RCS by replacing the prior rent cap of 75 percent of Fair Market Rents (FMRs) with a cap of 90 percent of Small Area Fair Market Rents (SAFMRs), which are more location-specific [Paragraph 9–5]. For some smaller, more rural properties, this change could allow for faster renewals without the expense of a rent comparability study.
In addition, for Option 1 and 2 renewals and comparability adjustments, unassisted units in a site may be used in lieu of an RCS in some scenarios [Paragraph 9-6]. To qualify for this method:
- At least 25 percent of each unit type being renewed must be occupied by unassisted tenants;
- The Section 8 units and the units occupied by unassisted tenants must be nearly identical;
- For each unit type in the contract, the proposed Section 8 contract rent must be no greater than the average rent paid by unassisted tenants who reside in the same type of unit; and
- Occupancy rates in the units available for occupancy by unassisted tenants must not be significantly lower than occupancy rates for the same unit types in the overall market area.
Non-Shelter Services and Amenities
The new chapter updates provisions on adjustments for non-shelter services and amenities. The update draws a distinction between services “included in rent,” those services a tenant may reliably access for no additional charge, and those that are “incidental.”
Continuation of services. The RCS should include a valuation for non-shelter services, and the Renewal Guide in effect requires an owner either to have a proven track record and commitment to taking all reasonable steps to continue providing the service for the coming five-year period or to have a written agreement with a credible service provider that specifies certain details of the service provision. Applicable services must be listed each year on the site’s Rent Schedule. If services are interrupted or discontinued, HUD plans to track this through a required change to the annual Rent Schedule.
Availability of services in the community. The update clarifies that the valuation of services and amenities must take into account whether similar services and amenities are available in the surrounding community [Paragraph 9–9(C)(2)]. The value of a service or amenity may be affected by the availability in the community of similar services or amenities. For example, if a project offers a small collection of books as a library, but it’s located in close proximity to a municipal library that contains a much larger selection, then the value of that amenity may be diminished. The intent of this revision is to assure that the valuation of services and amenities is in line with their market appeal to tenants.
Internet access. This update also addresses adjustments for internet access, such as site-wide WiFi. If it was unclear whether an RCS should make an adjustment where tenants are provided with internet access for no additional fee, this new update confirms that an adjustment should be made based on actual comparable data from the surrounding market area.
New services. Where new services are added as part of a Chapter 15 Capital Repairs Program transaction, those services may be included in the RCS subject to HUD approval. The owner’s submission must include detailed information about the services to be introduced, including who will provide the services, which facilities will be used to provide services, and other details. The owner must then implement the proposed services or risk a reduction in HAP rents under the terms of the Chapter 15 addendum.
The Renewal Guide imposes new timing requirements for transactions involving an early termination of an existing HAP renewal in favor of a new renewal. For those transactions, if closing occurs more than 180 days after the date of submission, HUD will require a letter from the appraiser confirming that current rents are not lower than in the original study. Also, if closing occurs more than 18 months after the original submission, the owner must submit a fully updated RCS.
The update clarifies the process for owner appeals of substantive review of an RCS. Specifically, it clarifies the process for identifying factual errors in a third-party RCS ordered by HUD. Timelines are more specific, and the owner may submit one revised version of the RCS with the appeal [Paragraph 9-18]. This is a change from the draft Chapter 9 released last year, which stated that an owner could not supply a revised owner-commissioned RCS as part of an appeal. Now, the final guidance permits the owner to supply a revised owner-commissioned RCS within this process.