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HUD’s Office of Multifamily Housing Proposes Rent Adjustment Change to Mark-to-Market Regulations

HUD’s Office of Multifamily Housing Programs (Multifamily) issued on July 16 in the Federal Register a proposed change to rent adjustments in the Mark-to-Market regulations. The proposed rule would clarify that all annual rent adjustments for projects subject to a Mark-to-Market Restructuring Plan are determined by applying an operating cost adjustment factor (OCAF) established by HUD. For HUD-assisted multifamily housing projects that now have rents greater than market rents, the Mark-to-Market program helps to preserve the properties as affordable to low-income households by restructuring project debt to an amount that can be supported by rents that reflect actual lower market rents.

Existing regulations include a provision authorizing Multifamily to approve a private owner’s request for rent based on the cost of maintaining the property and covering mortgage payments (budget-based rent adjustment), instead of basing a rent adjustment on an OCAF. The summary of the proposed rule amendment claims the current regulation is contrary to the statutory framework and is inconsistent with Mark-to-Market renewal contracts, which allow only OCAF rent adjustments. Multifamily proposes to remove Section 401.412(b) of the existing regulations in order to conform them to the statutory provision, terms of Mark-to-Market renewal contracts, and Multifamily’s practice of adjusting rents annually using only an OCAF.

The preamble to the proposed rule change explains that the “Multifamily Assisted Housing Reform and Affordability Act of 1997” (MAHRAA), which authorized the Mark-to-Market program, is intended to preserve the affordability of HUD-assisted multifamily low-income rental housing, while also reducing the long-term cost of providing federal rental assistance to these properties. Under Mark-to-Market, HUD-assisted multifamily properties that have realized above-market rents and are subject to an expiring Section 8 must undergo: 1) restructuring of the property’s HUD-insured or HUD-held debt, and 2) initial renewal of its Section 8 contract so that a new first loan can be supported by modified (lower, or “mark-to-market rate”) rents.

Renewal of a Section 8 contract is governed by section 515 of MAHRAA. HUD is required to offer and an owner is required to accept an initial renewal of a project’s Section 8 contract if the renewal is in accord with the terms specified in a mortgage restructuring and rental assistance sufficiency plan. Under such a Restructuring Plan, renewal rents are based on either comparable market rents or a budget in limited circumstances. In either case, rents are adjusted annually by an OCAF.

HUD issues an initial renewal contract for a maximum 20-year term reflecting the renewal rents and requiring annual OCAF rent adjustments. The owner executes a minimum 30-year use agreement. As long as the use agreement remains in place, subsequent renewals are governed by MAHRAA.

The preamble provides more detail about Section 8 contract renewals under Section 515 of MAHRAA, Restructuring Plans, details of a 1998 interim rule, late 1999 amendments to Section 524 of MAHRAA, and the 2000 final rule. After the final rule went into effect, Multifamily determined that during the minimum 30-year use agreement, subsequent renewal authority for projects subject to a Restructuring Plan is Section 515, not Section 524, and that only after the use agreement expires and the owner is granted a subsequent renewal contract would a discretionary budget-based rent adjustment be available instead of an OCAF. This determination is reflected in Mark-to-Market renewal contracts, which were finalized in the year following publication of the final rule and which provide for annual rent adjustments by an OCAF without any provision authorizing a budget-based rent adjustment instead of an OCAF.

Therefore, Multifamily is proposing to remove Section 401.412(b) in order to eliminate the misperception that a budget-based rent adjustment is available for projects that are subject to a Restructuring Plan.

Comments are due September 14.

The Federal Register notice is at: https://bit.ly/2OyPvUe

More information about Section 8 Project-Based Rental Assistance is on page 4-61 of NLIHC’s 2020 Advocates’ Guide.