Project Developer Cash Flows Under HUD's Section 8 Moderate Rehabilitation Program

GAO discussed the Department of Housing and Urban Development's (HUD) Section 8 Moderate Rehabilitation Program, focusing on why developers were willing to pay substantial consultant fees to win projects. GAO found that: (1) developers received substantial funds above their acquisition costs to rehabilitate low-income housing projects; (2) combining proceeds from the sales of income tax credits with coinsured mortgages allowed developers to realize substantial gains on their limited investments at very little risk; (3) aside from tax credits, the program gave developers a 15-year rent subsidy for units set aside for low-income families; (4) different administering agencies, such as HUD, state tax credit allocation agencies, and local governments, awarded multiple benefits, since there was little or no centralized oversight of the benefits package provided to each project; (5) HUD stated that improperly inflated rehabilitation costs led to excessive rental subsidy payments; (6) the excessive subsidies for the eight projects reviewed could total $25 million for the 15-year period; (7) some projects received more financial assistance than required to encourage rehabilitation; and (8) developers could afford the consultant fees to secure the subsidies, with the cash proceeds of $3,500 to more than $11,000 per unit, and still receive substantial cash proceeds. GAO believes that the program needs a centralized reviewing authority to ensure limited use of federal funds to maximize the number of low-income housing units.