Project-Based Rental Assistance
HUD Should Update Its Policies and Procedures to Keep Pace with the Changing Housing Market Gao ID: GAO-07-290 April 11, 2007In light of the pressing need for rental housing affordable to low-income households and concerns that the Department of Housing and Urban Development (HUD) may not be committed to maintaining its Section 8 project-based housing stock--a key source of such housing--Congress directed GAO to assess HUD's efforts to preserve its project-based housing and recommend ways to improve these efforts. This report discusses (1) patterns in the volume and characteristics of HUD's Section 8 project-based properties; (2) tools and incentives that are available to encourage property owners to stay in the program; and (3) the views of property owners, managers, and industry representatives on HUD's preservation efforts. To address these issues, GAO analyzed HUD data, reviewed pertinent legislation and regulations, and interviewed HUD officials and industry representatives.
GAO identified a number of patterns in the volume, characteristics, and location of HUD's project-based Section 8 housing between 2001 and 2005. During this period owners renewed 92 percent of Section 8 rental assistance contracts and 95 percent of the units covered by these contracts. While relatively few owners left the program voluntarily, most of those we interviewed did so to seek higher rents in the private market or to convert their units into condominiums. The properties most likely to leave the program were those with few Section 8 units, family-occupied units, those in poor physical condition, and those located in markets with rapidly escalating housing values. HUD offers several incentives to keep Section 8 property owners in the program. Owners that used these incentives between 2001 and 2005 most often chose the Mark-to-Market and Mark-up-to-Market programs, both of which adjust rents to conform to prevailing market conditions. Some owners used HUD programs that offered additional financing for property rehabilitation to participants in the Section 236 mortgage reduction program and the Section 202 mortgage program for housing for the low-income elderly and persons with disabilities. HUD officials, owners, and industry representatives told us that many Section 8 owners also opted to use the Low-Income Housing Tax Credit and tax-exempt bonds, both of which the IRS administers through state housing finance agencies. Some property owners, managers, and industry representatives cited concerns with certain HUD policies and practices, especially the one-for-one replacement policy for Section 8 units and the Operating Cost Adjustment Factors (OCAF) payment process. GAO found that the one-for-one replacement policy, which prohibits reductions in the total number of Section 8 units in a property when a contract is renewed, had led some owners to leave the program. Property owners noted that they could not reconfigure their properties to supply larger units that were in higher demand, especially by elderly tenants. Although not required by statute to adopt this policy, HUD did so in order to preserve as many units as possible but is reviewing it in light of the growing concerns. Owners also expressed frustration with the long delay in OCAF adjustments, the use of statewide averages, and the inability of the process to deal with emergency situations. Finally, owners offered several suggestions that may warrant HUD's attention, including improving the Section 8 contract renewal guidance and revisiting physical inspection guidelines.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-290, Project-Based Rental Assistance: HUD Should Update Its Policies and Procedures to Keep Pace with the Changing Housing Market
This is the accessible text file for GAO report number GAO-07-290
entitled 'Project-Based Rental Assistance: HUD Should Update Its
Policies and Procedures to Keep Pace with the Changing Housing Market'
which was released on April 12, 2007.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
United States Government Accountability Office:
GAO:
April 2007:
Project-Based Rental Assistance:
HUD Should Update Its Policies and Procedures to Keep Pace with the
Changing Housing Market:
GAO-07-290:
GAO Highlights:
Highlights of GAO-07-290, a report to congressional committees
Why GAO Did This Study:
In light of the pressing need for rental housing affordable to low-
income households and concerns that the Department of Housing and Urban
Development (HUD) may not be committed to maintaining its Section 8
project-based housing stock”a key source of such housing”Congress
directed GAO to assess HUD‘s efforts to preserve its project-based
housing and recommend ways to improve these efforts. This report
discusses (1) patterns in the volume and characteristics of HUD‘s
Section 8 project-based properties; (2) tools and incentives that are
available to encourage property owners to stay in the program; and (3)
the views of property owners, managers, and industry representatives on
HUD‘s preservation efforts. To address these issues, GAO analyzed HUD
data, reviewed pertinent legislation and regulations, and interviewed
HUD officials and industry representatives.
What GAO Found:
GAO identified a number of patterns in the volume, characteristics, and
location of HUD‘s project-based Section 8 housing between 2001 and
2005. During this period owners renewed 92 percent of Section 8 rental
assistance contracts and 95 percent of the units covered by these
contracts. While relatively few owners left the program voluntarily,
most of those we interviewed did so to seek higher rents in the private
market or to convert their units into condominiums. The properties most
likely to leave the program were those with few Section 8 units, family-
occupied units, those in poor physical condition, and those located in
markets with rapidly escalating housing values.
HUD offers several incentives to keep Section 8 property owners in the
program. Owners that used these incentives between 2001 and 2005 most
often chose the Mark-to-Market and Mark-up-to-Market programs, both of
which adjust rents to conform to prevailing market conditions. Some
owners used HUD programs that offered additional financing for property
rehabilitation to participants in the Section 236 mortgage reduction
program and the Section 202 mortgage program for housing for the low-
income elderly and persons with disabilities. HUD officials, owners,
and industry representatives told us that many Section 8 owners also
opted to use the Low-Income Housing Tax Credit and tax-exempt bonds,
both of which the IRS administers through state housing finance
agencies.
Some property owners, managers, and industry representatives cited
concerns with certain HUD policies and practices, especially the one-
for-one replacement policy for Section 8 units and the Operating Cost
Adjustment Factors (OCAF) payment process. GAO found that the one-for-
one replacement policy, which prohibits reductions in the total number
of Section 8 units in a property when a contract is renewed, had led
some owners to leave the program. Property owners noted that they could
not reconfigure their properties to supply larger units that were in
higher demand, especially by elderly tenants. Although not required by
statute to adopt this policy, HUD did so in order to preserve as many
units as possible but is reviewing it in light of the growing concerns.
Owners also expressed frustration with the long delay in OCAF
adjustments, the use of statewide averages, and the inability of the
process to deal with emergency situations. Finally, owners offered
several suggestions that may warrant HUD‘s attention, including
improving the Section 8 contract renewal guidance and revisiting
physical inspection guidelines.
What GAO Recommends:
To enhance its efforts, GAO recommends that HUD modify its one-for-one
replacement policy for Section 8 units and address property owners‘
concerns about reimbursements for operating costs in high-cost areas.
HUD provided comments on a draft of this report and generally agreed
with the findings and has efforts underway to address the
recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-290].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Orice Williams at (202)
512-8678 or williamso@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
While Most Owners Renewed Their Contracts, Patterns Were Identified
Among Properties Leaving the Program:
Mark-to-Market and Other Programs Encourage Owners to Keep Their
Properties in the Section 8 Program:
HUD Policies and Procedures Have Caused Frustration for Some Property
Owners and Could Cause Others to Leave the Project-Based Section 8
Program:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Housing and Urban
Development:
Appendix III: Number of Opt-outs by State in Identified Census
Divisions:
Appendix IV: Number of Opt-outs by Metropolitan Area for the 3 Census
Divisions with the Highest Percentage of Opt-outs:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Project-Based Section 8 Rental Assistance Programs with
Corresponding Financing Programs:
Table 2: Number of Section 8 Contract Renewals and Terminations, Fiscal
Years 2001-2005:
Figures:
Figure 1: Section 8 Renewal and Opt-out Processes:
Figure 2: Contract Opt-outs, Foreclosures/Enforcements, and
Terminations by Subprogram, Fiscal Years 2001-2005:
Figure 3: Total Terminated Contracts Nationwide, Fiscal Years 2001-
2005:
Figure 4: Percentage of Section 8 Properties Renewed and Terminated by
the Percentage of Units Subsidized, Fiscal Years 2001-2005:
Figure 5: Percentage of Section 8 Properties Renewed and Terminated by
Type of Occupant, Fiscal Years 2001-2005:
Figure 6: Percentage of Section 8 Properties Renewed and Terminated by
Ownership Type, Fiscal Years 2001-2005:
Figure 7: Percentage of Section 8 Properties Renewed and Terminated by
REAC Scores, Fiscal Years 2001-2005:
Figure 8: Percentage of Section 8 Properties Renewed and Terminated by
Census Division, Fiscal Years 2001-2005:
Figure 9: National and Selected State Opt-outs as a Percentage of All
Active Section 8 Units, Fiscal Years 2001-2005:
Figure 10: Factors Contributing to HUD Fatigue:
Abbreviations:
FHA: Federal Housing Administration:
HUD: Department of Housing and Urban Development:
IRP: Interest Reduction Payment:
IRS: Internal Revenue Service:
LIHTC: Low-Income Housing Tax Credit:
MAHRA: Multifamily Assisted Housing Reform and Affordability Act:
NAHMA: National Affordable Housing Management Association:
OAHP: Office of Affordable Housing Preservation:
OCAF: Operating Cost Adjustment Factors:
PAE: Participating Administrative Entities:
PBCA: Performance Based Contract Administrators:
REAC: Real Estate Assessment Center:
REMS: Real Estate Management System:
TRACS: Tenant Rental Assistance Certification System:
United States Government Accountability Office:
Washington, DC 20548:
April 11, 2007:
The Honorable Patty Murray:
Chairman:
The Honorable Christopher Bond:
Ranking Member:
Subcommittee on Transportation, Housing and Urban Development, and
Related Agencies:
Committee on Appropriations:
United States Senate:
The Honorable John W. Olver:
Chairman:
The Honorable Joe Knollenberg:
Ranking Member:
Subcommittee on Transportation, Housing and Urban Development, and
Related Agencies:
Committee on Appropriations:
House of Representatives:
A continuing need for rental housing affordable to low-income
households has prompted congressional efforts to preserve the
availability of rental units subsidized by existing programs. Under the
project-based Section 8 program, the Department of Housing and Urban
Development (HUD) contracts with property owners that receive rental
subsidies for units rented to low-income tenants.[Footnote 1] These
tenants pay a portion of the rent, generally 30 percent of their
adjusted income, and the subsidies make up the rest. In exchange for
guaranteed rent payments from HUD, owners commit to restricting their
units to low-income tenants for 15 to 40 years under contracts written
or renewed since the program's inception in 1974. Since then, HUD has
provided rent subsidies to about 1.4 million households through
approximately 24,000 project-based Section 8 housing contracts.
Beginning in the late 1980s, however, these long-term contracts began
to expire and some owners opted not to renew them. In response, HUD has
sought ways to keep property owners in the program and preserve Section
8 housing.
Concerned that HUD was not committed to preserving the stock of
existing project-based Section 8 housing and may be encouraging owners
to opt out of the program or not encouraging them to stay, the Senate
report accompanying the fiscal year 2006 Transportation, Treasury,
Housing and Urban Development, the Judiciary, the District of Columbia,
and Independent Agencies Appropriations Act directed HUD to report on
the status of the agency's efforts to preserve project-based Section 8
housing, including an analysis of contract activity from 2001 to 2005.
The analysis was to include the number of units that had left the
program and the number that remained, by year, state, and locality. In
August 2006, HUD reported to Congress on the number of contract
renewals and terminations, types of assistance offered through the
preservation program, and steps taken to protect affected tenants.
In addition to requiring the HUD report, the Senate report directed us
to assess HUD's efforts to preserve affordable housing and provide
recommendations on how to improve these efforts. To this end, this
report examines (1) patterns in the volume, characteristics, and
location of HUD's project-based Section 8 properties--including those
that left the program--from 2001 through 2005; (2) available tools and
incentives for encouraging project-based Section 8 owners to keep their
properties in the program; and (3) views of property owners, managers,
and industry representatives on HUD's Section 8 housing preservation
efforts and the effect of those efforts on owners' decisions to opt out
or keep properties in the program.
To identify patterns in the volume and characteristics of properties
from 2001 through 2005, we analyzed data extracts from HUD's Real
Estate Management System (REMS) from 2001 through 2005.[Footnote 2] Our
analysis looked at the significance of a number of variables, such as
occupancy type and subsidy level, on owners' decisions to opt out of
the Section 8 program. We also reviewed a study that HUD commissioned
from Econometrica, Inc., that was published in January 2006 and that
compared multifamily properties leaving the project-based Section 8
program with multifamily properties remaining in it.[Footnote 3] In
addition, we monitored the progress of HUD's analysis of terminated
project-based Section 8 housing units and those retained over a 5-year
period and compared HUD's results with our analysis. To determine what
tools and incentives HUD used to preserve project-based Section 8
properties, we reviewed and summarized legislation and regulations
pertaining to project-based Section 8 housing preservation, documented
HUD requirements, and conducted interviews with HUD headquarters and
selected field office staff, nonprofit organizations, contractors,
state and local government agencies, and lenders. To obtain the views
of owners, managers, and industry representatives on HUD's preservation
efforts, we conducted standardized interviews with both for-profit and
nonprofit owners of Section 8 properties, housing industry
organizations, state housing finance agencies, and other stakeholders
in five localities.[Footnote 4] We judgmentally selected these
locations based on the following characteristics: (1) percentage of
units that opted out of the project-based Section 8 program from 2001
through 2005, (2) vacancy rates, (3) geographic location, (4)
percentage of households with worst-case housing needs, and (5) HUD
regional and field office program performance. We conducted our work
between October 2005 and April 2007 in Baltimore, Chicago, Columbus,
Houston, Los Angeles, New York, and Washington, D.C., in accordance
with generally accepted government auditing standards. Appendix I
provides additional details on our scope and methodology.
Results in Brief:
Using data on the project-based Section 8 housing program from 2001
through 2005, we were able to identify patterns in the volume,
characteristics, and locations of contract renewals and terminations,
including contracts that property owners chose not to renew (opt-outs)
from 2001 through 2005.[Footnote 5] Among other things:
* The majority of project-based Section 8 housing owners chose to stay
in the program. A total of 13,218 project-based Section 8 contracts
(931,570 units) were renewed from 2001 through 2005, or 92 percent of
the contracts during the review period and 95 percent of the units
covered by these contracts.[Footnote 6] Conversely, 8 percent or 1,155
contracts (covering 51,131 units) were terminated--6 percent because
owners opted out of the program and 2 percent because HUD foreclosed on
the properties from 2001 through 2005. Terminations decreased from 240
contracts (covering 10,020 units) in 2001 to 160 contracts (covering
6,001 units) in 2005.
* Our discussions with property owners, managers, and industry
representatives in five metropolitan areas indicated that market
conditions were the primary factors in owners' decisions to leave or
remain in the project-based Section 8 program and that HUD did not
encourage owners to opt out of the program. In many cases, owners opted
out to seek higher rents or to convert their units to condominiums in
thriving housing markets such as Los Angeles and Manhattan.
* We identified a number of key characteristics of properties that left
the project-based Section 8 housing program. We found that more
properties that had been rented to families left the program than
properties that had been rented to individuals such as the elderly and
persons with disabilities. Nonprofit owners, whose mission is to
provide affordable housing, were more likely to renew their contracts,
as were Section 202 owners whose mortgages require that they serve low-
income elderly and persons with disabilities for up to 40
years.[Footnote 7] We also found that a number of properties remained
at risk of leaving the program because they had failed HUD's
inspections. Finally, the number of contract renewals and opt-outs
varied by geographic location. The largest percentage of opt-outs
occurred in several midwestern states--Illinois, Indiana, Michigan,
Ohio, and Wisconsin---the southern Atlantic (including Maryland, West
Virginia, and the District of Columbia), and the Pacific coast
(including Alaska and Hawaii). They were generally concentrated in
large metropolitan areas.
HUD offers a number of tools and incentives to property owners seeking
additional funding to support their Section 8 properties. Owners that
did use incentives primarily chose the Mark-to-Market program, under
which Section 8 owners with above-market rents receive additional
assistance from HUD in exchange for reducing rents, and the Mark-up-to-
Market program, which adjust rents to prevailing market conditions
while maintaining affordability for low-income households. These tools
have been effective in preserving some Section 8 projects, but they
apply to only a portion of the project-based Section 8 housing stock.
Owners have used other HUD programs to maintain project-based Section 8
housing to a lesser extent. For example, these programs allow those
project-based Section 8 owners that previously had participated in the
Section 236 program, which effectively reduces the mortgage interest to
1 percent, and the Section 202 program for the construction of elderly
housing, to obtain additional financing for Section 8 property
rehabilitation. Program officials and others whom we interviewed said
that to supplement HUD's tools, nonprofits and housing industry
representatives also encouraged Section 8 owners to obtain funds
through programs outside of HUD, such as the Low-Income Housing Tax
Credit (LIHTC) program and tax-exempt bonds. HUD officials told us that
they did not consistently collect data on Section 8 properties that had
used tax credits or tax-exempt bond financing.
Section 8 owners, property managers, and industry representatives we
interviewed indicated that owners generally did not opt out of the
project-based Section 8 program because of dissatisfaction with HUD's
preservation efforts but because of market factors. Many owners said
they remained in the program because they wanted the guaranteed income,
and others--primarily nonprofit organizations--said they remained
because their mission was to preserve affordable housing. However, some
property owners, managers, and industry representatives expressed
frustration with some of HUD's polices and practices, which they said
could drive some property owners out of the program. Specifically,
managers and owners expressed concern with HUD's lack of flexibility in
policies such as the one-for-one replacement requirement, which
prohibits reductions in the total number of Section 8 units in a
property. While not mandated by statute, HUD adopted this policy in an
attempt to maximize the number of units remaining in the program. Under
this policy, HUD does not allow owners to reduce the number of Section
8 units when a contract is renewed. For example, HUD does not allow
owners to reconfigure efficiency apartments into fewer one-bedroom
units, even when market studies show great demand for such units. We
identified a Chicago owner who chose to remove an 82-unit property from
the program because HUD would not renew a contract with 3 fewer units.
In addition, owners and managers indicated that some HUD practices and
policies could cause financial distress. In particular, owners and
managers expressed frustration with HUD's Operating Cost Adjustment
Factors (OCAF), an annual inflation adjustment that reflects changes in
operating expenses such as insurance and utilities. These owners and
managers said that OCAF did not take into account cost differences
across regions, was often out of date by the time it was applied, and
did not respond to emergency situations. Owners and managers also
identified some HUD policies and practices that they said lacked
clarity, were not consistently applied, or were administratively
burdensome and could weigh on owners' decisions to stay in or opt out
of the program when their project-based contracts expired. For example,
some property managers and owners told us that they needed full-time
staff to manage project-based Section 8 administrative requirements, an
expense that was particularly burdensome for owners with few section 8
units. HUD officials told us that they were currently reviewing the one-
for-one replacement policy for elderly housing and the OCAF adjustment
process to take into account emergency situations and rapid increases
in utilities, insurance, and property taxes in some areas.
To help ensure that affordable housing is provided to those persons in
need and to keep pace with the changing housing market, we are
recommending that HUD (1) expedite its reconsideration of the one-for-
one replacement requirement for project-based Section 8 housing and
broaden its consideration to all project-based Section 8 housing
properties on a case-by-case basis; and (2) address concerns about the
need for more timely and better-targeted OCAF reimbursements. We are
also recommending that HUD determine whether any of the other issues
raised by owners, such as unclear and burdensome policies and
procedures and inconsistent application of policies, are contributing
to owners' decisions to opt out of the Section 8 program and that the
agency take steps to address these issues as appropriate.
We received comments on a draft of this report from HUD's Assistant
Secretary for Housing---Federal Housing Commissioner (appendix II). The
Commissioner generally agreed with the report findings, which were
consistent with the findings of HUD's report to Congress. He also noted
that it confirmed that HUD was using a variety of tools to encourage
continued participation in the project-based Section 8 program.
Further, he said that the agency was already taking steps that begin to
address two of our recommendations: (1) modify the one-for-one
replacement policy to allow some reduction or reconfiguration of
existing units when appropriate, and (2) evaluating the OCAF adjustment
process and plan to complete and announce the results by the end of
fiscal year 2007. Finally, he said that HUD officials were aware of
concerns raised by property owners that we cited and that the agency
was always willing to consider recommendations that could reduce
administrative costs and encourage owners to stay in the program.
Background:
The Housing and Community Development Act of 1974, a major overhaul of
housing laws, created the tenant-based and project-based Section 8
rental assistance programs for low-income households. The tenant-based
program (now called Housing Choice Vouchers) provides rental assistance
to eligible households to rent houses or apartments in the private
market from landlords who are willing to accept the vouchers. Under the
project-based rental assistance program, HUD enters into contracts with
property owners to provide rental assistance for a fixed period of
time.
The project-based Section 8 program has multiple subprograms, including
Section 8 New Construction and Substantial Rehabilitation, Loan
Management Set-Asides, Preservation, and Property Disposition.[Footnote
8] Rental assistance under these project-based Section 8 subprograms
has been generally used in conjunction with other public funding. For
example, a Section 8 New Construction/Substantial Rehabilitation
property could have been financed by a Federal Housing Administration
(FHA) insured loan, a Section 202 direct loan, a U.S. Department of
Agriculture Section 515 direct loan, or state housing finance agency
bonds. Some of these programs provided financing for the construction
or rehabilitation of affordable rental housing prior to the 1974 Act.
(See table 1).
Table 1: Project-Based Section 8 Rental Assistance Programs with
Corresponding Financing Programs:
Rental Assistance Program: Section 8 New Construction and Substantial
Rehabilitation;
Description: Provides rent subsidies in new or substantially
rehabilitated projects. Subsidy initially covered the difference
between tenants' payment and fair market rent, as determined by HUD.
Subsidy contracts were for 20 to 40 years. Tax incentives and financing
arrangements also reduced owners' effective mortgage interest rates and
project rents. No new contracts have been issued since the 1990s, and
only existing contracts have been renewed.
Rental Assistance Program: Section 8 Loan Management Set-Aside;
Description: HUD contracts with owners of HUD-insured multifamily or
HUD-held housing projects experiencing financial problems. The program
seeks to minimize defaults on HUD-insured multifamily rental projects
by ensuring a reliable income stream. Families receive a rental subsidy
equal to the difference between their share of the rent and the rent
charged by the owners, which was not to exceed applicable fair market
rents.
Rental Assistance Program: Section 8 Property Disposition;
Description: HUD forecloses on subsidized properties with HUD-held
multifamily mortgages for properties with project-based Section 8 or
sells HUD- owned multifamily properties with project-based Section 8
assistance.
Rental Assistance Program: Section 8 Preservation; Description: This
program assists multifamily properties by providing project-based
Section 8 subsidies to a property in order to preserve its low-income
status. There are no new contracts for this program.
Financing Program: FHA Insurance;
Description: The FHA Multi- Family Mortgage Insurance program enhances
credit for rental housing developments through the provision of federal
loan guarantees. These guarantees provide a financing option in
addition to those available in the private conventional market. FHA
provides mortgage insurance for multifamily housing, supporting the
construction of new apartment projects, and the refinancing of older
ones.
Financing Program: Section 202 Elderly and Disabled Housing Direct Loan
Program;
Description: Provides direct loans at below-market rates for up to 40
years to finance the construction of rental housing for low-income
elderly and disabled households. Projects built between1974 and 1991
also receive project-based Section 8 rent subsidies. The program is no
longer active, although projects developed under it continue to
operate. In 1990, the program was restructured to provide capital
advances for the development of elderly housing under Section 202, and
a Section 811 capital advance program was implemented to develop
housing for persons with disabilities. Both 202 and 811 projects
receive operating assistance through Project Rental Assistance
Contracts.
Financing Program: Section 515;
Description: USDA's Rural Housing Service Section 515 program began in
the early 1960s. At that time, loans were generally made for 40 years,
but borrowers were encouraged to refinance their properties in the
private market and to prepay their loans. The program provides direct
loans to developers at a 1 percent interest rate. Supplementary rental
assistance is provided to approximately half of the units through USDA,
while some units also receive rental assistance through the Section 8
programs. After 1989, loans were precluded from prepayments, and loans
that were made before that date were restricted.
Financing Program: Housing Finance Development Authority;
Description: Projects financed by state Housing Finance Agencies (HFAs)
through mortgage revenue or multifamily housing bonds.
Source: GAO.
[End of table]
Project-based Section 8 assistance may be provided only for tenants
with incomes no greater than 80 percent of an area's median income.
Tenants generally pay rent equal to 30 percent of adjusted household
income. As part of the Section 8 contract, property owners and managers
are responsible for ensuring that households meet program eligibility
requirements and calculating households' payments. HUD pays rent
subsidies directly to the property owners but does not pay them a
separate administrative fee. The owners' include their administrative
costs in their HUD-approved rents.
Project-based Section 8 properties are subject to physical and
management reviews. Most Section 8 contracts also require the
submission of annual financial reports from property owners. These
reviews and reports are to ensure management accountability and the
physical condition of public and assisted housing. HUD's Real Estate
Assessment Center (REAC) conducts physical inspections of all HUD
multifamily properties every 1 to 3 years, depending on the property's
previous physical inspection score. Project-based Section 8 properties
are subject to annual management and occupancy reviews to verify
compliance with the terms of the project-based Section 8 contracts,
regulatory and management agreements, and management plans.
In the mid-to late-1990s, Congress and HUD made several important
changes to the duration of housing assistance contracts, contract
rents, and management of on-going contracts.
* In the mid-1990s because of budgetary constraints HUD shortened the
terms of subsequent renewals after the initial 15-to 40-year terms
began expiring. HUD generally reduced the contract renewal terms to 1
or 5 years, with the funding renewed annually subject to
appropriations.
* In 1997, Congress passed the Multifamily Assisted Housing Reform and
Affordability Act (MAHRA) to ensure that the rents HUD subsidized
remained comparable with market rents. Over the course of the initial
contracts with owners, contract rents in some cases had begun to
substantially exceed local market rents as market conditions changed.
MAHRA generally requires an assessment of each property when it nears
the end of its original contract term to determine whether the contract
rents are comparable to current market rents and whether the property
has sufficient cash flow to meet its debt and daily and long-term
operating expenses. However, certain projects are exempt from the
market comparability requirement (e.g., projects financed by state
agency bonds). If the contract rents are higher than market rents, HUD
can decrease the contract rents to market rents upon renewal.
Conversely, if the expiring contract rents are below market rates, HUD
may increase the contract rents to market rates upon renewal.
* In 1999, because of staffing constraints (primarily in HUD's field
offices) and the workload involved in renewing the increasing numbers
of rental assistance contracts reaching the end of their initial terms,
HUD began an initiative to contract out the oversight and
administration of most of its project-based contracts. The entities
that HUD hired--typically public housing authorities or state housing
finance agencies--are responsible for conducting on-site management
reviews of assisted properties; adjusting contract rents; reviewing,
processing, and paying monthly vouchers submitted by owners; renewing
contracts with property owners; and responding to health and safety
issues at the properties. These performance-based contract
administrators (PBCA) now administer the majority of project-based
Section 8 contracts.
In the late 1980s, initial Section 8 contracts began expiring; by 2003,
all of the original 20-year contracts had expired. Forty-year contracts
will expire between 2014 and 2023. Section 8 owners are offered six
options upon contract expiration. According to the HUD Section 8
Renewal Guide, Section 8 owners may[Footnote 9]
* renew without any modifications, with rents capped at HUD's market
levels;
* renew with rents that are elevated to market rents through the Mark-
up-to-Market program;
* renew with rents that are reduced to market rents through the Mark-
to-Market program;
* renew as a Section 8 "exception project;"[Footnote 10]
* renew as a Section 8 preservation or portfolio reengineering
demonstration projects;[Footnote 11] and:
* opt out of the Section 8 contract.
When their contract expires, project-based Section 8 owners may decide
not to renew their Section 8 contracts and convert their units from
affordable housing to market rents. Once owners remove their properties
from HUD programs, Section 8 households receive enhanced vouchers as
long as they remain in their units.[Footnote 12]
Owners are required to give both tenants and HUD notice of their
intention to renew or opt out 1 year before the Section 8 contract's
expiration (see fig. 1). An owner who intends to opt out must also
provide HUD with a 120-day notification. An owner who intends to renew
is required to submit to HUD or the PBCA a request for contract renewal
and a rent comparability study (when required) at least 120 days before
the contract expires. Local HUD offices review the study to determine
if the property's current rents are at, above, or below market rates.
If rents are at or below market rates, HUD field office staff will make
any necessary adjustments and execute a new Section 8 contract. If
rents are above market, HUD staff renews the contract (at above-market
rents) for up to 1 year and forward the owner's submission to the HUD
Office of Affordable Housing Preservation (OAHP) for a Mark-to-Market
restructuring. OAHP assigns properties to participating administrative
entities (PAE) to carry out restructurings under the Mark-to-Market
program on behalf of HUD.[Footnote 13] The owner then signs a renewal
contract with the contract administrator.
Figure 1: Section 8 Renewal and Opt-out Processes:
[See PDF for image]
Sources: GAO; Art Explosion (images).
Note: Exception projects are not subject to market comparability rent
study and are not referred to OAHP.
[End of figure]
In a January 2004 report, we found that state and local agencies offer
incentives to preserve affordable housing, including project-based
Section 8 housing. Some of these agencies perceived that the
information on opt-outs was not readily available. In this report, we
recommended that HUD make this information more widely available and
useful.[Footnote 14]
States and localities may use funds provided by other federal programs
to subsidize housing for low-income tenants. The HOME program,
authorized by the Cranston-Gonzalez National Affordable Housing Act, is
the primary block grant program that state and local governments use to
develop affordable housing. Under the Low-Income Housing Tax Credit
(LIHTC) Program, authorized by the Tax Reform Act of 1986, state
housing finance agencies provide federal tax incentives to private
investors to develop housing affordable to low-income tenants. Some
states and localities have established housing trust funds and other
financial mechanisms that have helped organizations acquire HUD
properties and maintain their affordability to low-income tenants when
owners want to sell properties and exit the program.
Federal housing programs serve many different types of households and
provide units that are affordable at different income levels. For
example, under the LIHTC program, either 20 percent of units must be
affordable to households with incomes of less than 50 percent of area
median household income, or 40 percent of units must be affordable to
households earning incomes less than 60 percent of the area median
income. HUD pays assistance for project-based Section 8 units on behalf
of tenants with incomes no greater than 80 percent of area median
income. Further, the states and localities may use other tools and
incentives, such as offering property tax relief, to encourage owners
to keep serving low-income tenants.
While Most Owners Renewed Their Contracts, Patterns Were Identified
Among Properties Leaving the Program:
We found a number of patterns in the volume, characteristics, and
locations of HUD's project-based Section 8 housing contract renewals
and terminations, from 2001 through 2005. First, from 2001 through
2005, 92 percent of project-based Section 8 housing assistance
contracts and 95 percent of assisted units that were eligible for
renewal were renewed. We also found that the percentages of opt-outs,
foreclosures, and enforcements varied by project-based Section 8
subprogram. Relatively few owners opted out of the Section 8 program,
and of those we interviewed, most reported that they did so to seek
higher rents in the private rental market or to convert their units
into condominiums. Second, we found that opt-outs shared other
characteristics, such as property size and physical condition. Finally,
opt-outs were more prevalent in some regions and localities.
Few Project-based Section 8 Owners Opted Out of the Program, and Opt-
Outs Varied by Subprogram:
From 2001 through 2005, 14,373 of the 24,000 project-based contracts
and 982,701 of the 1.4 million units were determined to be eligible for
renewal or termination. Of these, 92 percent of the eligible contracts
and 95 percent of the eligible units remained in the program (table 2).
Table 2: Number of Section 8 Contract Renewals and Terminations, Fiscal
Years 2001-2005:
Action: Renewal;
Contracts: Number: 13,218;
Contracts: Percent: 92;
Units: Number: 931,570;
Units: Percent: 95.
Action: Termination;
Contracts: Number: 1,155;
Contracts: Percent: 8;
Units: Number: 51,131;
Units: Percent: 5.
Action: Total;
Contracts: Number: 14,373;
Contracts: Percent: 100;
Units: Number: 982,701;
Units: Percent: 100.
Source: HUD.
Note: The contracts included in the analysis are those that had either
renewal or termination activity during fiscal years 2001 through 2005.
These do not represent all Section 8 contracts.
[End of table]
The percentage of opt-outs while small overall, varied by subprogram.
As shown in figure 2, only 1 percent of project-based Section 8
contracts whose owners financed the properties through the Section 202
program opted out from 2001 through 2005. This percentage is generally
low largely because Section 202 property owners are nonprofit entities
established for the singular purpose of providing housing for the
elderly or persons with disabilities, and because the statute requires
low income use at least through the original term of the loan. As a
result, it is in the owners' interest to renew their project-based
Section 8 contracts.[Footnote 15] Similarly, Section 8 contracts that
also carry a U.S. Department of Agriculture Section 515 mortgage had a
much lower percentage of opt-outs (3 percent), in part due to mortgage
prepayment restrictions. Conversely, contracts listed under Property
Disposition, which are troubled properties, had the highest percentage
of opt-outs, foreclosures, and enforcements. In total, of the 8 percent
of contract terminations, 6 percent were due to opt-outs and 2 percent
were due to contract foreclosures and enforcements.
Figure 2: Contract Opt-outs, Foreclosures/Enforcements, and
Terminations by Subprogram, Fiscal Years 2001-2005:
[See PDF for image]
Source: GAO.
Note: Percentage of opt-outs and foreclosures/enforcements may not
exactly equal percentage of terminations due to rounding.
[End of figure]
As shown in figure 3, the total number of project-based Section 8
contract opt-outs nationwide declined from 240 in 2001 to 120 in 2003,
but increased slightly in 2004 to 125 and increased further in 2005 to
160. Conversely, the number of foreclosures and enforcements has
continued to decline slightly over the period.
Figure 3: Total Terminated Contracts Nationwide, Fiscal Years 2001-
2005:
[See PDF for image]
Source: 2006 HUD Report to Congress.
[End of figure]
Properties Leaving the Program Shared Similar Characteristics:
The properties that owners withdrew from the program shared similar
characteristics. Specifically, owners with properties that were
generally not fully subsidized by the program, were family occupied,
were for profit, or were in poor physical condition had a higher
percentage of opt-outs. Conversely, we did not find substantial
differences in the percentage of opt-outs based on property size,
meaning owners with fewer units were as likely to opt out as owners
with more units.
Partially Subsidized Properties Had a Higher Percentage of Opt-Outs:
Properties that were only partially supported by the Section 8 program
comprised 4,492, or 33 percent, of the total 13,847 Section 8
properties that renewed or terminated their contracts from 2001 through
2005.[Footnote 16] As shown in figure 4, about 13 percent of those
properties with a less than 50 percent Section 8 subsidy level that
were eligible to opt out during the 5-year period from 2001 through
2005 did so, compared with about 4 percent of the properties that were
fully supported by the Section 8 program. Owners with properties with
subsidy levels between 50 and 97 percent were as likely to remain in
the program as those that were fully supported. These results were
consistent with the views of owners about their desire to continue
receiving guaranteed payments that Section 8 provides. About 2 percent
of all partially and nearly fully subsidized properties were terminated
through foreclosures or enforcements actions.
Figure 4: Percentage of Section 8 Properties Renewed and Terminated by
the Percentage of Units Subsidized, Fiscal Years 2001-2005:
[See PDF for image]
Source: GAO.
Note: Percentage may not add up to 100 percent due to rounding. There
were 7 properties with no data on subsidy level; of these properties,
29 percent were opt-outs and 71 percent were foreclosures/enforcements.
We consider properties with 98-100 percent Section 8 to be fully
supported, since some properties have an unsupported unit for use by
the property manager.
[End of figure]
Family-occupied Properties Had a Higher Percentage of Opt-outs Than
Others:
A higher percentage of properties identified as renting to families
left the project-based Section 8 program than properties rented to the
elderly and persons with disabilities. As shown in figure 5, 9 percent
of family-occupied properties opted out of the program from 2001
through 2005 compared to about 2 percent for properties identified as
renting to the elderly and persons with disabilities. The lower opt-out
percentage for properties renting to the elderly and persons with
disabilities can be attributed largely to the fact that many were
financed through Section 202. As stated earlier, Section 202 owners
find it is in their interests to continue to serve the very-low income
elderly and persons with disabilities. Moreover, properties for the
elderly and persons with disabilities are generally owned by non-profit
entities and have use restrictions which require their low-income use
through the terms of the properties' original loan. Our analysis also
found that family-occupied properties also experienced a slightly
higher percentage of foreclosures/enforcements than properties for the
elderly and persons with disabilities.
Figure 5: Percentage of Section 8 Properties Renewed and Terminated by
Type of Occupant, Fiscal Years 2001-2005:
[See PDF for image]
Source: GAO.
Note: Percentage may not add up to 100 percent due to rounding. There
were 323 properties with no data on occupancy type; of these
properties, 7 percent were opt-outs and 3 percent were foreclosures/
enforcements. Eleven properties did not fall into any of the listed
categories.
[End of figure]
For-profit Owners Had a Higher Percentage of Opt-outs than Others:
For-profit and limited-dividend property owners had a higher percentage
of opt-outs than other types of property owners. Limited-dividend
ownerships are formed under federal or state laws or regulations and
can have restrictions involving rents, charges, capital structure, rate
of return, or methods of operations. As shown in figure 6, collectively
these two types of property owners represented 57 percent of all
project-based Section 8 properties and had the highest percentage of
opt-outs, at 8 and 6 percent, respectively. Conversely, nonprofit
owners had the lowest percentage of opt-outs at 2 percent. The
percentage of foreclosures and enforcement actions for nonprofits was
also slightly lower than for all other types of ownerships.
Figure 6: Percentage of Section 8 Properties Renewed and Terminated by
Ownership Type, Fiscal Years 2001-2005:
[See PDF for image]
Source: GAO.
Note: Percentage may not add up to 100 percent due to rounding. There
were 1,345 properties with no data on ownership type; of these
properties, 10 percent were opt-outs and 5 percent were foreclosures/
enforcements.
[End of figure]
Properties in Poor Physical Condition Have a Higher Percentage of Opt-
outs:
When properties repeatedly fail physical inspections, HUD officials
told us that they take action to protect the tenants by issuing
vouchers and terminating the Section 8 contract. The officials noted
that in many cases these owners wish to be relieved of HUD oversight
and may believe they can do so by failing to meet HUD requirements. HUD
reviews each such case and may take punitive enforcement action against
the owner. These owners are more likely to opt out. Physical REAC
inspection scores reflect as-is condition with negative adjustments for
certain health and safety issues. Figure 7 shows that 94 percent of the
properties received passing scores, with 50 percent of the properties
receiving superior scores of over 89 and 44 percent receiving
satisfactory scores (60-89).[Footnote 17] Also, as shown in figure 7,
the percentage of opt-outs for properties with substandard or severe
scores was substantially higher than the percentages of opt-outs for
properties with satisfactory or superior scores.
Figure 7: Percentage of Section 8 Properties Renewed and Terminated by
REAC Scores, Fiscal Years 2001-2005:
[See PDF for image]
Source: GAO.
Note: Percentage may not add up to 100 percent due to rounding. There
were 206 properties with no information on REAC physical inspection
score; of these properties, 16 percent were opt-outs and 20 percent
were foreclosures/enforcements.
[End of figure]
The Percentage of Opt-outs Varies Slightly by Region:
Our analysis of HUD data shows that the percentage of opt-outs varies
slightly by region. Certain parts of the country had more opt-outs than
other regions (fig. 8). Several southern states and New England
experienced the smallest percentage of opt-outs. Appendix III and IV
contain analyses of the number of opt-outs by state and the 3 regions
with the highest number of opt-outs, by metropolitan areas.
Figure 8: Percentage of Section 8 Properties Renewed and Terminated by
Census Division, Fiscal Years 2001-2005:
[See PDF for image]
Sources: GAO; Art Explosion (map).
[End of figure]
Figure 9 shows the national average for opt-outs and states we visited
that experienced a higher percentage of opt-outs compared with the
national average. Consistent with the HUD commissioned study by
Econometrica, Inc., property owners and others we interviewed reported
that the location of the property and the changes in the valuation of
the neighborhood greatly influenced the owner's decision to remain or
leave the Section 8 program. For example, properties located in
neighborhoods with higher median incomes, higher median rent levels,
and lower poverty and vacancy rates had higher opt-outs as a percentage
of all active Section 8 units. Nationwide, over 50 percent of the opt-
outs were in metropolitan areas with a million or more residents.
Figure 9: National and Selected State Opt-outs as a Percentage of All
Active Section 8 Units, Fiscal Years 2001-2005:
[See PDF for image]
Source: GAO analysis of HUD data.
[End of figure]
Mark-to-Market and Other Programs Encourage Owners to Keep Their
Properties in the Section 8 Program:
HUD offers a number of tools and incentives to property owners seeking
additional funding to support their Section 8 properties. HUD reports
that when owners do choose to use the HUD incentives offered, they most
often select the Mark-to-Market and the Mark-up-to-Market programs. To
a lesser extent, some Section 8 owners are also eligible to participate
in the Section 236 decoupling program and the Section 202 refinancing
program to obtain additional funding for rehabilitation. However,
because these programs are available to only a portion of project-based
Section 8 owners and funding for rehabilitation is limited, project-
based Section 8 owners also use funds from programs outside of HUD for
property rehabilitation. HUD officials, owners, and industry
representatives have told us that Section 8 owners often opt to use non-
HUD programs such as LIHTC and tax-exempt bonds, which the IRS
administers mostly through state housing finance agencies. Both LIHTC
and tax exempt bonds may be combined with HUD incentives to maintain
housing at rents affordable to low-income households, but limited data
is available to show how often owners make this choice.
HUD Uses Mark-to-Market to Help Owners with Above-Market Rents Remain
in the Section 8 Program:
The Mark-to-Market Program, which may consist of a full or "lite"
restructuring, often provides an incentive for owners with rents above
the market rate to remain in the Section 8 program. Owners that have a
contract with the project-based Section 8 program and mortgages that
are insured by FHA or held by HUD must participate in the program if
their rents exceed the prevailing market level (as determined by
HUD).[Footnote 18] Through a full Mark-to-Market restructuring, the
owner is able to finance rehabilitation needs, cover projected
operating expenses, and, in some cases, enhance the property's reserve
fund to address future capital improvement needs. In exchange for
choosing a full Mark-to-Market restructuring, owners virtually always
receive a new project-based Section 8 contract with HUD and execute a
Use Agreement to maintain the property as affordable housing for at
least 30 years.
Owners of FHA-insured properties with above-market rents may request to
participate in Mark-to-Market lite. This option involves only rent
restructuring rather than a full mortgage restructuring and is
typically used when owners can reasonably cover all of their expenses
at the reduced rents and still maintain an affordable mortgage payment.
In addition to lower rents, these owners generally renew their
contracts for 5 years and remain eligible to participate in a Mark-to-
Market full restructuring at a later date. According to HUD, Mark-to-
Market lite is generally used for properties in better financial and
physical condition and rents that are only slightly higher than market
rents. Between 2001 and 2005, owners who renewed their contracts using
HUD incentives chose this option less often than the full
restructurings.
The Mark-to-Market program was scheduled to expire in October 2006.
However, the Revised Continuing Appropriations Resolution of 2007
extended the program for an additional 5 years (through September
2011).[Footnote 19] In addition, the House and Senate introduced the
Mark-to-Market Extension Act of 2007 in January 2007.[Footnote 20] If
enacted, the act would (1) expand the existing Mark-to-Market
authorities to provide for higher rents for eligible properties damaged
by disasters, (2) expand the program's authority to set rents above
existing rent level limits, (3) increase to 5 years the period during
which HUD may provide for not-for-profit debt relief, and (4) allow a
limited number of projects with rents below market to be eligible for a
Mark-to-Market restructuring.
Mark-up-to-Market Is Designed to Make the Section 8 Program More
Attractive by Ensuring That Owners Receive Market Rents:
Owners with below-market rents may participate in the Mark-up-to-Market
program, which permits them to raise rents to either market rates or
150 percent of the HUD-determined fair market rent, whichever is less.
The program provides additional rental revenue for property operations
and renovation and increased distributions to owners of limited-
dividend projects. Typically, Mark-up-to-Market transactions occur in
rental markets with escalating rents that have exceeded HUD's
established rent levels for area properties. The program's goal is to
encourage owners to renew their contracts and remain in the Section 8
program by removing the economic incentive to opt out.
HUD also has a Mark-up-to-Budget Program, which is a variation of the
Mark-up-to-Market program and has been used as an incentive for
nonprofit owners to preserve Section 8 properties with below-market
rents. The nonprofit owners must justify higher rents based on their
operating budget and repair costs. Under this program, HUD permits a
Section 8 budget-based rent increase for nonprofit properties to
perform capital improvements that will maintain the long-term financial
and physical viability of the property when current rents are not
sufficient. According to HUD, Mark-Up-to-Budget may be used by a
nonprofit to either facilitate a purchase transaction or finance needed
repairs.
HUD Also Offers Other Incentives to Preserve Certain Project-Based
Section 8 Affordable Housing:
HUD has offered a number of other incentives to preserve affordable
housing, such as the Section 236 decoupling, Section 202 refinance, and
HOME programs, but only certain properties in the project-based Section
8 portfolio are eligible to take advantage of these incentives. Under
Section 236 of the National Housing Act, HUD provides a monthly
Interest Reduction Payment (IRP) subsidy to reduce the mortgage
interest rate paid by property owners effectively to 1 percent. The
Section 236 decoupling program allows leveraging of the IRP to benefit
the owner and the property and to provide funds for rehabilitation. For
example, we visited a nonprofit's 72-unit Section 8 property in
Baltimore that according to the property manager had not undergone a
major renovation in more than 30 years. Because the property had a
Section 236 mortgage and project-based Section 8, the owner will be
eligible to participate in the Section 236 Decoupling program. Through
the 236 Decoupling program, the owner was able to receive additional
funds to make necessary repairs to the property and to begin
construction of a new community center.
HUD also administers a Section 202 refinancing program that allows
owners to refinance their direct HUD loans while maintaining their
Section 8 rent levels. According to HUD's August 2006 Report to
Congress, the Section 202 refinancing program was used sparingly from
2001 through 2005, but activity in the program increased significantly
during fiscal year 2006. In exchange for the refinancing, owners must
agree to maintain affordable occupancy restrictions, comply with HUD
requirements, and undertake appropriate rehabilitation of the property.
HOME is the largest federal block grant to state and local governments
and is designed exclusively to create affordable housing for low-income
households. Each year the program allocates approximately $2 billion
among the states and hundreds of localities nationwide. While HUD does
not maintain data on the number of project-based Section 8 properties
that use HOME funding, HUD officials have indicated that HOME funds
have been used as an incentive to keep project-based Section 8 owners
in the program.
Low-Income Housing Tax Credits, Tax-exempt Bonds, and Other Tools May
Also Help Preserve Project-based Section 8 Housing:
HUD officials, property managers, and industry groups told us that
project-based Section 8 owners also combine HUD preservation tools and
incentives with non-HUD preservation tools such as the LIHTC and tax-
exempt bonds to provide additional funds for rehabilitation.[Footnote
21] LIHTC and tax-exempt bonds can be used by themselves or with HUD
incentives such as Mark-to-Market to provide the Section 8 owner with
funding for substantial rehabilitation and repairs while keeping the
property affordable for low-income tenants. By combining incentives,
the owner would have enough resources for capital improvements while at
the same time ensuring that the property remained affordable through
use-agreements for at least 30 years. However, because LIHTC and tax-
exempt bonds are administered by state and local housing and finance
agencies, HUD does not consistently collect data on the number of
Section 8 properties using these incentives.
According to HUD officials, industry groups, and owners, project-based
Section 8 owners often use LIHTC to provide additional funding for
rehabilitation. To be eligible for consideration under the LIHTC, a
proposed property must:
* be a residential rental property;
* commit to one of two possible low-income occupancy threshold
requirements;
* restrict rents, including utility charges, in low-income units; and:
* operate under the rent and income restrictions for 30 years or longer
in accordance with written agreements with the agency issuing the tax
credits.[Footnote 22]
State and local housing finance agencies also sell tax-exempt housing
bonds (commonly known as Mortgage Revenue Bonds and Multifamily Housing
Bonds) and use the proceeds for several purposes. These include
financing low-interest mortgages for low-and moderate-income homebuyers
and acquiring, constructing, and rehabilitating multifamily housing for
low-income renters, including Section 8 properties.
HUD Policies and Procedures Have Caused Frustration for Some Property
Owners and Could Cause Others to Leave the Project-Based Section 8
Program:
While most owners renewed their contracts, some told us that they had
concerns with certain HUD policies and practices. Some described
multiple frustrations that led to what they and industry
representatives called "HUD fatigue." They said that frustrations with
HUD could result in owners opting out of their contracts even when
doing so might not be in their economic interest. Among the
frustrations they discussed were HUD's one-for-one replacement policy
for Section 8 units; policies and procedures that could lead to
economic distress, especially Operating Cost Adjustment Factors (OCAF)
payments; and a lack of clarity and consistency on HUD's part in
applying policies. We found that the one-for-one replacement policy, in
particular, resulted in a loss of some properties and higher vacancy
rates that could potentially lead to foreclosure. Industry
representatives whom we interviewed agreed that HUD could improve its
policies and procedures for project-based Section 8 housing, and both
industry representatives and owners offered suggestions for steps HUD
could take to improve preservation efforts.
Many Project-Based Section 8 Owners Were Committed to Remaining in the
Program:
In the locations we visited, we spoke to owners and managers who either
renewed their project-based Section 8 contract or decided to opt out of
the program. Of those owners and managers who decided to remain in the
program, many told us that their primary motivation was the guaranteed
rental income that the Section 8 subsidy provided. Some of the managers
in depressed rental markets in the locations we visited told us that
they would be unable to fill units or would have high vacancy rates if
they were to opt out of the Section 8 program. As we have seen,
nonprofit owners rarely decided to opt out of the Section 8 program and
told us that they stayed in the program because their mission was to
provide affordable housing.
Generally, Section 8 owners and property managers in the locations we
visited said that HUD did not encourage them to opt out of the Section
8 program. Rather, most stated that HUD tried to keep them in the
program by using various tools and offering incentives, such as the
Mark-to-Market and Mark-up-to-Market programs. HUD officials also
stated that although their goal was to preserve as many project-based
Section 8 housing units as they could, the final decision on whether to
renew or opt out was made by the owner and in most cases was driven by
market factors that were beyond HUD's control.
Some owners who left the program said that their decision was based on
economic or market factors and not on dissatisfaction with HUD.
Nonetheless, many of the owners (both those that remained in and those
that had left the Section 8 program), managers, and industry
representatives with whom we spoke cited areas in which the Section 8
program could be improved. Owners and managers expressed concerns
regarding specific HUD policies and practices that could result in opt-
outs, foreclosures, or cause financial distress or that lacked clarity
and consistent application. Figure 10 illustrates project-based Section
8 owners' frustrations with HUD that have caused opt-outs in the past
or could possibly increase the number of future opt-outs. As shown in
the graphic, although the majority of the opt-outs occur for economic
or market factors, growing owner frustration could upset the balance
causing more owners to consider opting out even when economic
conditions could be overcome or mitigated.
Figure 10: Factors Contributing to HUD Fatigue:
[See PDF for image]
Source: GAO.
[End of figure]
HUD's One-for-One Replacement Policy Can Result in Fewer Units and More
Opt-outs:
Some owners, managers, and industry representatives told us that some
HUD practices have not always kept pace with changes in market
conditions. For example, some owners told us that HUD required a one-
for-one replacement policy for Section 8 units when owners renewed
their contracts. That is, HUD generally does not allow owners to reduce
the number of project-based Section 8 units or to reconfigure the units
to better meet market demand, even when the alternative could result in
owners opting out and removing all of their units from the program.
HUD officials told us that although there was no statutory requirement
for one-for-one replacement of project-based Section 8 units, the
unwritten policy had been to require replacement of units in all cases.
HUD officials said that they based this policy on the public housing
requirement set by the Housing and Community Development Act of 1987.
However, Congress waived the one-for-one replacement requirement for
public housing units from 1995 through 1998, and the Quality Housing
and Work Responsibility Act of 1998 permanently eliminated it for
public housing. HUD officials said that their rationale for maintaining
their policy was that many of the properties had long waiting lists and
that any reductions in the number of available units was counter to a
demonstrated need for affordable housing.
Some owners, managers, and industry representatives pointed to the one-
for-one replacement requirement for all units as an example of one of
their frustrations with HUD policies. Some owners told us that HUD
would not allow them to reduce the number of Section 8 units in a
property or reconfigure the units to better meet market demand, even
when some types of units had high vacancy rates and other types had
long waiting lists. The requirement was particularly troublesome for
owners of units containing efficiency apartments, which in some areas
were not in high demand. These owners wanted to replace the efficiency
apartments with fewer one-bedroom units, which were in demand. For
example, one nonprofit that primarily serves the elderly told us that
even though the HUD field office approved a transaction converting
efficiencies into fewer one-bedroom units for one of their properties,
HUD headquarters reversed that decision based on its one-for-one
replacement policy. Also, a member of the National Affordable Housing
Management Association (NAHMA), an association that represents property
management agents, told us that the owners of an Iowa property rented
to elderly tenants had difficulties filling efficiency units. NAHMA
officials said that one of the owner's major obstacles in converting to
one-bedroom units was getting HUD's approval to waive the one-for-one
replacement policy. This lack of flexibility on the part of HUD in
insisting upon one-for-one replacement, rather than--for example--
evaluating each case on its own merits, could hinder the preservation
of certain project-based Section 8 units.
In at least one case, a property owner left the project-based Section 8
program because the owner could not convert some units into market-rate
housing. The owners of a property in Chicago wanted to split their
Section 8 contract and convert 3 of the 82 units to condominiums,
preserving the rest as Section 8. According to the owners, splitting
the contract made sense because the three units were in a building that
was separate from the remaining 79 units. HUD's Chicago Field Office
told the owners that they could not split the Section 8 contract
because of the one-for-one replacement policy. As a result, the owners
opted out, and all 82 units left the Section 8 program.
Other industry groups, including NAHMA, the National Leased Housing
Association, and the law firm of Nixon Peabody, which represents owners
and managers, also agreed on the need for HUD to adapt to changing
market conditions in reconfiguring Section 8 units. These
representatives told us that some of their transactions involving
project-based Section 8 units were being held up by issues relating to
reducing the number of unmarketable efficiencies or reconfiguring other
Section 8 units. HUD headquarters officials told us that they were
aware of the problem and that they were rethinking their policy,
particularly as it applied to units for elderly tenants, but were
concerned about setting precedent for owners to request unit reductions
even when the market factors were not an issue. HUD officials told us
that they had initially planned to focus on providing flexibility to
elderly developments affected by the one-for-one replacement policy.
But the officials added that they had seen the need to assess the
impact that the one-for-one replacement policy was having on family
properties as well. Nevertheless, not allowing owners to reconfigure
the number of units in their Section 8 contract in certain cases could
result in some owners deciding to opt out of the Section 8 contract
altogether.
The OCAF Adjustment Process is Not Timely and Imposes a Financial
Burden on Some Owners:
Some of the owners, managers, and industry representatives told us that
the OCAF inflation adjustments that owners are entitled to receive
every year are not timely, equitable, or responsive to price hikes or
emergency situations. OCAF adjustments are calculated by HUD annually
using nine expense categories, including utilities, property taxes, and
insurance that are aggregated at the state level.[Footnote 23] Section
524 of MAHRA gives HUD broad discretion in setting OCAF adjustments,
with one exception: that application of an OCAF adjustment will not
result in a negative rent adjustment.
Owners, managers, and industry representatives were concerned that the
OCAF adjustments were not made on a timely basis. According to a number
of industry groups, the adjustments are often obsolete by the time they
are adopted. HUD officials confirmed that there was a lag of about 15
to 18 months from the time that HUD collected the data to the time that
the adjustments became effective. One industry representative told us
that HUD was unable to revise the adjustments to respond to any cost
hikes during the lag time period.
Some of the owners and the industry representatives also told us that
they were concerned with the unequal distribution of OCAF adjustments
within states. Some owners and industry representatives pointed out
that the formula HUD used did not take into account differences in
markets within states for commodities such as electricity and
insurance. They said that in some markets, the cost of utilities and
insurance often escalated monthly, while in other areas this cost was
relatively stable. For example, a property manager in New York City
told us that it did not seem equitable to have the same OCAF adjustment
for New York City, where costs were extremely high and likely to
fluctuate precipitously, as for upstate New York, where costs were much
lower.
Some of the owners, managers, and industry representatives that we
talked to also said that OCAF adjustments were not able to respond to
price hikes or emergency situations in many parts of the country. For
example, a member of NAHMA that managed elderly developments in Iowa
told us that the OCAF adjustments during the last 4 years had been too
small given the rapid escalation of natural gas rates in that region of
the country. As a consequence, the management company had to use
capital reserves to address operating cash deficits, putting it at risk
of being unable to cover unexpected capital repairs. Another NAHMA
member that managed a 120-unit project-based Section 8 property for the
elderly in Minnesota said that heating costs had increased 22 percent
in 2006 over the previous year but that the OCAF adjustment for 2006
was only 2.8 percent. NAHMA officials said that rising utility costs
had become an enormous challenge for many Section 8 owners. In
particular, NAHMA officials noted that HUD needed a more timely
mechanism to address emergency operating cost increases--for example,
after natural disasters. Officials from Stewards of Affordable Housing,
a group representing some of the largest nonprofits that own and manage
project-based Section 8 properties, also stated that OCAF adjustments
did not keep up with inflation. For instance, a 2006 survey of members
of the Florida Association of Homes for the Aging and the Southeastern
Affordable Housing Management Association reported that none of the
respondents had had an insurance premium increase of less than 50
percent between 2005 and 2006. Further, the survey found that, on
average, premiums had doubled in one year, and one respondent reported
a tenfold increase in its insurance premium.
HUD officials, including the Deputy Assistant Secretary for Multifamily
Housing, said that they were aware of the lag in OCAF adjustments, the
equity concerns, and the difficulties in responding to price hikes and
emergency situations. However, they said that HUD was taking steps to
address these issues. In the short term, HUD officials said that they
were allowing owners to tap into their capital reserve accounts to
cover unforeseen operating cost increases. However, this practice works
only as long as reserves are available or future OCAF adjustments are
guaranteed. In the long run, HUD officials plan to evaluate ways to
change the OCAF adjustment factors and make them responsive to market
factors. To deal with the issue of market differences within a state,
HUD is currently considering a proposal to make adjustments to OCAF
using data from metropolitan areas instead of states. HUD officials
said that they were also considering an industry group's proposal to
address owners' concerns about price hikes and emergency
situations.[Footnote 24] The proposal would authorize owners to borrow
against future rent adjustments using their capital reserve accounts as
collateral. Owners and industry groups contended that if HUD neglected
to revise the OCAF adjustment process, owners in high-cost areas or
those experiencing emergency cost escalations might not receive enough
in subsidies to meet their expenses and could consider opting out of
the program.
Other Factors Affect Owners' Cash-Flows and Abilities to Undertake
Rehabilitation:
Some owners, managers, and industry groups expressed concerns that some
HUD policies and procedures could affect the owners' cash flows and
undermine their abilities to undertake needed rehabilitation of their
properties. Among these were (1) late subsidy payment to owners, (2)
high administrative costs relative to the number of Section 8 units in
a property, (3) confusion about the Limited English Proficiency
requirement, and (4) unclear or vague HUD policies and procedures.
Late Subsidy Payments:
Several owners and HUD staff told us that project-based Section 8
Housing Assistance Payments were frequently late, especially when HUD
was under continuing resolutions. In November 2005, we reported that
from fiscal years 1995 through 2004, HUD disbursed three-fourths of its
monthly Section 8 payments on time but that thousands of payments were
late each year.[Footnote 25] Owners who are heavily reliant on HUD's
subsidy to operate their properties are the most likely to be severely
affected by payment delays. Owners reported receiving no warning from
HUD when payments would be delayed and reported that such notification
would allow them to mitigate the effects of a delay. In our November
2005 report, we recommended that HUD, among other things, streamline
and automate the contract renewal process to prevent processing errors
and delays and eliminate paper/hard-copy requirements to the extent
practicable; develop systematic means to better estimate the amounts
that should be allocated and obligated to project-based Section 8
payment contracts each year; monitor the ongoing funding needs of each
contract; ensure that additional funds were promptly obligated to
contracts when necessary to prevent payment delays; and notify owners
if their monthly payments would be late, including in such
notifications the date when the monthly payment would be made. In
response to the report, HUD officials said that they would take actions
to better predict the funding allocation process and develop a system
to more promptly notify owners when payments were expected to be late.
Owners told us that when they did not receive payments on time, they
often had to use reserve funds to cover critical operating expenses,
leading to cash flow problems. During these periods, some owners
delayed needed maintenance to make up for the budget shortfall. For
example, we found in our work for this current report that in
Baltimore, a nonprofit owner of a project-based Section 8 property for
elderly residents delayed critical repairs to the boiler system when
the payments were delayed. The owner used reserve funds that should
have been used for repairs to cover operating costs. This situation
contributed to a lower physical REAC score for the owner because the
boiler was in need of repair.
HUD headquarters officials told us that they had created a working
group of HUD officials and industry representatives that would provide
recommendations to HUD for improving its budget process to reduce late
Section 8 payments.
Administrative Costs Relative to Number of Section 8 Units:
HUD officials said that they require the same information and
documentation from all owners, no matter how many Section 8 units they
own. Therefore, owners with a few Section 8 units may find the
administrative costs of participating in the program burdensome. Some
of the property owners we met with confirmed this fact. HUD officials
said that owners with larger numbers of Section 8 units were able to
spread the fixed administrative costs across more units and achieve
economies of scale. Most of these owners' expenditures went to hire
dedicated staff to manage the program, which requires separate
accounting, management, occupancy, and oversight systems. The owners
said that they were also incurring costs for background checks on
Section 8 applicants and annual tenant recertifications. For example,
in Columbus, Ohio, a manager told us that an owner with a few Section 8
units decided to opt out in 2002 because of the high administrative
costs of keeping 24 Section 8 units in a development that had a total
of 141 units. The manager said that by opting out, the owner saved up
to $25,000 in payroll costs and was still able to keep the majority of
the tenants who were eligible to receive Section 8 incentives through
tenant vouchers administered by the local public housing agency. HUD
field office staff in Columbus told us that for some owners who had few
Section 8 subsidized units, keeping separate financial, management, and
occupancy records for both Section 8 and other tenants might not be
feasible.
The January 2006 HUD commissioned study by Econometrica, Inc., reported
a similar finding. The study noted that owners with a smaller portion
of their portfolio in Section 8 units incurred additional operating
costs for maintaining staff members with the skills needed to
administer the Section 8 program. The study concluded that operating a
Section 8 property required administrative skills specific to the
program and it might not be economically feasible for these owners to
employ staff members with the needed skills.
The Limited English Proficiency Requirement:
There is some concern and confusion among project-based Section 8
owners and managers on what is required of them to comply with their
obligations to persons with limited English proficiency. Under Title VI
of the Civil Rights Act of 1964, and its implementing regulations,
recipients of federal financial assistance have a responsibility to
ensure meaningful access to programs and activities for these
individuals. Presidential Executive Order 13166, "Improving Access to
Services to Persons with Limited English Proficiency" directs each
federal agency that extends assistance subject to Title VI to publish
guidance for its recipients clarifying their obligations to persons
with limited English.
HUD published the final "Guidance to Federal Financial Assistance
Recipients Regarding Title VI Prohibition against National Origin
Discrimination Affecting Limited English Proficient Persons" on January
22, 2007. Under this guidance, recipients of HUD funds use four factors
to determine the extent of their obligations to provide services to
those with limited English proficiency. These four factors include: (1)
the number or proportion of such persons who are eligible to be served
or likely to be encountered by the program or grantee, (2) the
frequency with which these persons come in contact with the program,
(3) the nature and importance of the program, activity, or service
provided by the program to people's lives, and (4) the resources
available to the grantee/recipient and costs. Based on these factors, a
HUD recipient would develop an implementation plan to address the
identified needs of the populations they serve that have limited
English proficiency.
Some owners, managers, and their representatives said that they agreed
with the goal that this group have access to HUD programs but that it
was not clear how HUD was implementing this order. Particularly, these
officials were concerned with the lack of clarity in describing the
written translations and oral interpretation services HUD was to
provide and those that would be the owners' responsibility. NAHMA
officials stated that the perception was that the owners would have to
bear most of the cost of providing the written translations of vital
documents and oral interpretation services free of charge to both
applicants and residents. However, these officials noted that HUD had
proposed no additional funding to offset these higher costs.
Furthermore, NAHMA officials said that expenses for translating
documents or providing interpretation services were not accounted for
in the OCAF adjustments or included in rent comparability studies.
NAHMA officials added that they were concerned because HUD was already
holding property owners accountable to the requirements for limited
English proficiency as part of fair housing and compliance reviews.
These officials stated that holding the owners to these requirements
could expose affordable housing owners to unwarranted fair housing
complaints and discrimination lawsuits. Also, NAHMA officials stated
that adding this regulatory expense without increasing compensation
changed the nature of the agreement between HUD and the property owner.
Given this extra cost and additional legal liability, owners could be
inclined to leave the program, because they would not have to deal with
the requirement once they had opted out.
Unclear HUD Policies and Procedures:
Some owners, managers, and industry representatives raised concerns
about the clarity of HUD policies and procedures and the way the
policies were applied. Of particular concern were the Section 8 Renewal
Guide and the REAC physical inspection score. MAHRA established
policies for renewing project-based Section 8 contracts, and HUD
adopted these regulations in 1998. The rules and procedures were then
incorporated in the Section 8 Renewal Guide, which HUD published in
1999. HUD officials noted that they were currently in the process of
issuing updates to the Renewal Guide. However, according to a group
representing the private owners, only parts of the Renewal Guide had
been updated despite many changes to HUD's policies and procedures,
particularly regarding the Mark-to-Market and Mark-Up-to-Market
program.
Largely as a result of the out-of-date information, the guide can be
confusing, particularly to owners that have a few project-based Section
8 units. Property owners and industry representatives cited gray areas
in the guide, particularly concerning the Mark-to-Market option. For
example, in Baltimore we visited two small nonprofits that owned
Section 8 properties. Property managers for both properties faced
challenges navigating complex HUD policies that they said the guide did
not adequately explain, such as when and under what conditions the
owner could choose a different renewal option. While several nonprofit
groups offer training on HUD policies for project-based Section 8
properties, a property manager told us they did not have the resources
to pay for training on their own. We also were told that a lack of
understanding of HUD policies had caused some owners to receive low
scores on management reviews that comprised their Section 8 status. HUD
officials told us that they had set up a task force to examine the
guide and that it was currently being updated.
REAC inspections are an integral part of HUD's efforts to oversee the
properties in its inventory of affordable housing. HUD's physical
inspections require that multifamily housing be decent, safe, sanitary,
and in good repair. The standards establish specific requirements for
the site, the dwelling units, and common areas. HUD has developed a
detailed list of items that inspectors are required to review at
properties and specifically defines what constitutes a deficiency for
each inspected unit. However, some owners, managers, and
representatives of multifamily housing industry groups we interviewed
had concerns about the reliability, consistency, and fairness of REAC's
inspections. For example, owners and property managers in New York City
and Houston indicated that REAC inspectors recorded violations for
minor issues that often were outside of the managers' control.
Some of the owners also stated that they were cited for minor
violations rather than for cumulative violations and that inspections
tended to be arbitrary. For example, HUD's Chicago field office and a
Chicago nonprofit reported that REAC inspectors ignored the
deteriorating overall condition of a property because the inspectors
were either inexperienced or afraid to enter some of the buildings.
Specifically, Chicago's Lawndale apartments--which had one owner with
1,105 units in 104 buildings spread over a large area in North
Lawndale--received passing REAC physical condition scores, although the
overall complex was in disrepair. The end result was that Lawndale was
to be split up and sold to a number of owners, resulting in about 700
of the 1,105 Section 8 units leaving the project-based Section 8
program. HUD officials told us that because of the enormous size of the
Lawndale apartments, the complex was not a typical HUD Section 8
project-based property. They defended the REAC process, stating that
the random nature of its inspections could result in passing scores at
a large project like Lawndale, which had a mix of substandard and
passing units. They believed that what happened at Lawndale was an
isolated incident but that such an outlier should have been more
carefully monitored by HUD.
Conclusions:
Most project-based Section 8 property owners opt to renew their
contracts with HUD, but the 8 percent of expiring contracts that were
not renewed between 2001 through 2005 represent over 50,000 units that
are no longer subsidized through the program. Our work identified some
recurring program issues and concerns including the rigidity of the one-
for-one replacement requirement, difficulties with the OCAF adjustments
and other administrative burdens, all of which could affect the
program's positive retention rate as more properties come up for
renewal.
Based on the views of Section 8 owners and managers we interviewed,
HUD's one-for-one replacement policy has made certain properties
vulnerable to exiting the program. Particularly, not allowing owners to
reconfigure hard-to-fill efficiency apartments in some markets into
fewer one-bedroom units could cause financial difficulty for owners and
lead to a decision to opt out of the program. Also by not allowing
owners to reduce the number of units in a property because of the
desire to have one-for-one replacement, HUD may inadvertently be
forcing owners out of the program. Consistent with congressional action
that eliminated the one-for-one replacement requirement in HUD's Public
Housing programs, we are encouraged that HUD has started to rethink
this policy in light of changing market conditions especially for the
elderly, and understand the difficulty HUD faces in balancing the need
to preserve affordable housing with the requests of property owners.
However, without a more flexible policy, HUD risks losing more
properties from the Section 8 program. As more contracts come up for
renewal, owners may continue to leave the program if they do not have
the flexibility to make changes that the market demands to existing
housing stock. HUD's field offices, which are best situated to
understand local market needs, may be in the best position to make
these types of property decisions.
The OCAF adjustment process, which is required by MAHRA, is another
area that may threaten HUD's preservation efforts. As currently
implemented, HUD estimates of costs for items such as utilities and
insurance in some cases do not reflect current market conditions,
primarily because they are estimated 15-18 months before they take
effect and are applied statewide. As a result, property owners in high-
cost areas may not receive enough in subsidies to meet their expenses.
Moreover, during emergency situations HUD does not have a process to
address rapidly changing prices such as spikes in energy costs or
rapidly increasing insurance rates in coastal areas. Ultimately, owners
divert money from capital improvement projects to cover such operating
expenses. These types of issues could result in more owners leaving the
program. Given that many property owners emphasized that guaranteed
rental income was a primary reason for staying in the program, HUD
needs to help ensure that properties are covered for the increases in
costs incurred. If HUD does not act quickly to review the OCAF
adjustment process, property owners may be forced to leave the Section
8 program due to lack of sufficient funding.
Finally, owners, managers, and industry representatives raised a number
of other issues that could drive them out of the program. These issues
included certain policies and procedures that were described as
unclear, inconsistently applied, or administratively burdensome.
Specifically, late subsidy payments, higher administrative costs for
owners with fewer Section 8 units, confusion about requirements for
persons with limited English proficiency, and unclear HUD policies and
procedures could contribute to owners opting out of the Section 8
program, taking units that cannot be replaced out of the affordable
housing stock.
Recommendations for Executive Action:
To help ensure that project-based Section 8 preservation efforts meet
the needs of a changing housing market, we recommend that the HUD
Secretary direct the Deputy Assistant Secretary for Multi-family
Housing to:
* modify the one-for-one replacement requirement to allow for a case-
by-case assessment of the merits of permitting owners to reduce the
number of project-based Section 8 units or reconfigure the units to
better meet market demand and to expand its reconsideration of this
policy beyond elderly properties,
* expeditiously reevaluate its OCAF adjustment process to make sure
that the adjustments reflect local variations, are implemented in a
more timely manner, and are responsive to emergency situations, and:
* determine if any of the additional issues raised by owners such as
policies and procedures that are unclear, inconsistently applied, or
administratively burdensome could contribute to owners' opting out of
the Section 8 program and take steps to address these issues.
Agency Comments and Our Evaluation:
We received comments on a draft of this report from HUD's Assistant
Secretary for Housing---Federal Housing Commissioner that have been
reproduced in appendix II. The Commissioner generally agreed with the
report, and noted that it confirmed that HUD was not encouraging
property owners to opt out of the project-based Section 8 program but
rather was using a variety of tools to encourage continued
participation. He also said that the report contained several positive
suggestions for improving program delivery, but added that none of the
recommendations would likely deter owners seeking to maximize their
economic gains in a "hot" real estate market from leaving the program.
We agree that most owners that opt out of the project-based Section 8
program do so because of market factors rather than dissatisfaction
with HUD's preservation efforts. However, given the finite supply of
project-based Section 8 properties, addressing some of the recurring
program issues and concerns we identified could help keep some owners
from opting out of the program. The Commissioner also noted that the
report lacked data on the number of opt-outs that might have been
avoided if the proposed recommendations had been implemented. We agree
that such data would have allowed us to determine specific reasons
owners opted out of the program, but because HUD does not track
properties and the reasons that they leave the program, the data were
not readily available.
Addressing our recommendation that HUD modify the one-for-one
replacement policy to allow for case-by-case assessments of requests to
reduce the number of or reconfigure existing units, the Commissioner
expressed concern that revising the policy might save one or two
projects from opting out but lead to a greater net loss of assisted
units. He added, however, that HUD was aware of the need to accommodate
market demand and would be evaluating the policy and identifying
criteria for approving such requests. We are encouraged that HUD is
considering a more flexible policy and continue to support the position
that criteria can be developed that balance market demand and the need
to preserve affordable housing.
Regarding our recommendation that HUD expeditiously reevaluate its OCAF
adjustment process, the Commissioner wrote that the department was
aware of industry concerns about the use of statewide data, the
approximately 18-month lag between the time data is collected and the
adjustments go into effect, and the fact that OCAF does not take into
account emergency situations. He noted that HUD had initiated a review
of the OCAF methodology, including the actual costs to the portfolio
resulting from the lag time and the use of statewide data, and planned
to complete and announce the results of the review by the end of fiscal
year 2007.
Concerning our recommendation that HUD determine if any of the
additional issues that property owners raised could be contributing to
the decision to opt out of the program, the Commissioner said that HUD
was aware of the concerns we cited and was always willing to consider
recommendations that could reduce administrative costs and encourage
owners to stay in the program. For example, he acknowledged that the
project-based Section 8 payments were late from time to time but added
that the agency was committed to improving the process and would
provide updates on its progress to GAO and the Congress.
We are sending copies of this report to the Chairman and Ranking
Minority Member of the Senate Committee on Appropriations; the Chairman
and Ranking Minority Member of the Senate Committee on Banking, Housing
and Urban Affairs; the Chairman and Ranking Minority Member of the
House Committee on Appropriations; the Chairman and Ranking Minority
Member of the House Committee on House Financial Services; the
Secretary of HUD; and other interested parties. This report will also
be available at no charge on GAO's Web site http://www.gao.gov.
Please contact me at (202) 512-8678 or williamso@gao.gov if you or your
staff have any questions about this report. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix V.
Signed by:
Orice M. Williams:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
To assess the Department of Housing and Urban Development (HUD's)
efforts to maintain Section 8 project-based housing stock and identify
any discernable patterns in its preservation efforts, we reviewed the
department's five-year analysis of units terminated and retained by
year, state, and locality for the period 2001-2005. HUD's analysis is
contained in a report to Congress, Section 8 Project-Based Contract
Renewals, sent to the Senate Appropriations Committee in August, 2006.
To facilitate this effort, HUD's Office of Multifamily Programs and
Systems, in June of 2006, provided us a data extract containing
information on all Section 8 contract activity for the 5-year period.
This extract incorporated and combined data from HUD's Real Estate
Management System (REMS), which reflects historical information on all
properties in HUD's multifamily portfolio; DATAMART, a subset of REMS,
which depicts data for all active multifamily properties; and the
Tenant Rental Assistance Certification System (TRACS), which
illustrates historical activity for all multifamily properties
subsidized department's Real Estate Assessment Center (REAC) database
system showing the most recent physical and financial conditions of
properties in HUD's multifamily portfolio.
To determine the number of Section 8 project-based units renewed and
terminated during the five year period as well as the characteristics
and locations of their associated properties, we reviewed, analyzed,
and replicated all numbers contained in HUD's report relating to
Section 8 contracts that left or remained in HUD's portfolio during
2001-2005. By comparing renewals and terminations, we determined the
extent to which HUD's Section 8 project-based housing stock grew or
declined. Our analysis also enabled us to observe patterns associated
with such actions. Following the same methodology HUD employed in its
Report to Congress, we counted individual contract renewals and their
associated units only once irrespective of how many times an owner
renewed the contract. Moreover, we only considered contracts as
renewals if such contracts were active at the end of 2005. In contrast,
terminated contracts included all situations where owners opted out of
their Section 8 contractual obligations anytime during the 5-year
period; mortgage foreclosures; and contracts terminated by HUD due to
enforcement actions. We counted contractual terminations as a single
event because, by definition, the contract no longer exists.
We also used the database extract to analyze characteristics of
properties that left or remained in the Section 8 Program that HUD did
not address in its report. For instance, we evaluated the types of
rental assistance associated with renewals and terminations; occupancy
and unit characteristics of properties whose owners elected to renew or
opt out of their contractual obligations; and the physical and
financial conditions of such properties. In addition, to determine
which geographic locations had what number of contract renewals or
terminations, and if any evidence of patterns in such locations
existed, we obtained census divisions from the Census Bureau website
and mapped properties using the divisions. Our analysis enabled us to
depict the locations where HUD was losing or gaining Section 8 housing
stock at the county level.
To ensure that the HUD data were reliable, we performed various
electronic tests and checks to determine (1) the extent to which the
data were complete and accurate, (2) the reasonableness of the values
reflected in the data variables, (3) if any data fields had missing
values, and, (4) whether any data limitations existed in the data we
relied upon to do our work. In addition, we reviewed existing
information about the quality and controls of the data systems and
discussed the data we analyzed, as well as the programming code used to
manipulate such data, with agency officials to ensure that we
interpreted them correctly to do our analysis. Based upon our
reliability assessment, we concluded that HUD's data were sufficiently
reliable for purposes of this report. Moreover, our analysis determined
that the information reflected in HUD's report to Congress was accurate
and reliable for purposes of ascertaining the extent to which Section 8
contracts and their associated units were terminated or gained during
the 5-year period 2001-2005. The data we obtained from HUD were current
as of June 15, 2006.
To identify the tools and incentives available to HUD to preserve
project-based Section 8, we reviewed and summarized legislation and
regulations pertaining to Section 8 project-based housing preservation
including the Multifamily Assisted Housing Reform and Affordability Act
(MAHRA) of 1997 and the Section 8 Renewal Guide. To identify the
incentives offered to Section 8 owners, we conducted interviews with
HUD headquarters staff in Washington, D.C. and field office staff in
Baltimore, Maryland; Chicago, Illinois; New York, New York; Los
Angeles, California; Columbus, Ohio; and Houston, Texas. To get
additional information about the use of these incentives, we conducted
interviews with Section 8 property owners and managers, nonprofit
organizations, industry groups, HUD contractors, and state and local
government finance agencies. To determine how frequently Section 8
owners used each tool or incentive, we extracted and analyzed data from
HUD's Real Estate Management System (REMS) and spoke with HUD officials
and industry groups. REMS includes historical information on all
properties in HUD's multifamily portfolio including data on project-
based Section 8 properties and contracts. One Section 8 property may
have multiple contracts.
To assess the views of for-profit and nonprofit property owners and
managers on HUD's Section 8 housing preservation efforts, we
interviewed industry representatives and conducted case studies in five
selected locations.[Footnote 26] We judgmentally selected for review
five HUD office locations (two regional offices and three field
offices) in which to complete interviews with for-profit and nonprofit
property owners and managers. Sites were selected based on the
following characteristics: (1) percentage of units that opted out from
2001 through 2005, (2) vacancy rate (3) geographic location, (4)
percentage of households with worst-case housing needs, and (5) HUD
regional and field office program performance. In the selected case
study locations, we conducted interviews with current and former
project-based Section 8 for-profit and nonprofit property owners and
managers as well as HUD office staff. We also interviewed performance-
based contract administrators (PBCA), entities responsible for
administering project-based Section 8 contracts, and participating
administrative entities (PAE), entities responsible for structuring
Mark-to-Market transactions, serving the selected case study locations.
For all of our interviews, we used a standardized interview guide to
ensure consistency. We gathered information on reasons selected for-
profit and nonprofit property owners stayed in or left the project-
based Section 8 program and perceptions about the effectiveness of
HUD's tools and incentives to preserve Section 8 housing. We also
reviewed relevant documentation provided by property owners and
managers, HUD regional and field office staff, PBCAs, and PAEs.
We conducted our work between October 2005 and April 2007 in Baltimore,
Maryland; New York, New York; Chicago, Illinois; Columbus, Ohio; Los
Angeles, California; Houston, Texas; and Washington, D.C., in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Housing and Urban
Development:
U.S. Department Of Housing And Urban Development:
Washington, DC 20410- 8000:
Assistant Secretary For Housing-
Federal Housing Commissioner:
Ms. Orice Williams Director:
Financial Markets and Community Investments:
U. S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Williams:
Thank you for this opportunity to review and provide comments on the
draft report, Project-Based Rental Assistance-HUD Should Update Its
Policies and Procedures to Keep Pace with the Changing Housing Market
(GAO-07-290). The report contains GAO's assessment of the Department's
efforts to preserve its project-based housing and includes a discussion
on the: (1) patterns in the volume and characteristics of HUD's Section
8 project-based portfolio; (2) tools and incentives that are available
to encourage property owners to stay in the program; and (3) the views
of property owners, managers, and industry representatives on HUD's
preservation efforts.
Before commenting on the specific recommendations of the report, I
would like to note the most significant finding of both the recent HUD
study on opt outs and the GAO review was that during fiscal years 2001-
2005, owners chose to renew participation in the Section 8 program
instead of opting out of the program for 92 percent of the expiring
contracts (and 95 percent of the units assisted). The decision to renew
occurred during a period when HUD implemented the Congressionally
mandated roll back of subsidies paid to reflect true market rent
levels. This phenomenal success reflects the aggressive efforts of the
Department to preserve affordable rental housing through such
initiatives as the Mark-to-Market and Mark-Up-To-Market programs,
Section 236 decoupling and the refinancing of Section 202 loans. I am
pleased that GAO's report confirmed that the Department was not
encouraging opt outs but rather using a variety of tools to induce
continued participation, while assuring that subsidy payments are
reasonable and that projects are properly maintained.
The Department would concur in the "Results in Brief' comments (draft
report page 4) that market conditions such as the ability to seek
higher rents by attracting market residents or successfully convert the
project to condominiums were the primary factors in an owner's decision
to leave or remain in the project-based Section 8 program. While the
report contains several positive suggestions for ways that HUD can
improve in the delivery of its program, it should be noted that none of
the recommendations would deter owners who seek to maximize their
economic gain in a "hot" real estate market.
It also is important to note that the GAO report lacks data on how many
of the opt outs that occurred might have been avoided if the proposed
recommendations were implemented, and the absence of such analysis
makes it difficult to evaluate the expected benefits from implementing
these suggestions. Nonetheless, the following responses have been
prepared to address the three recommendations outlined in the report:
GAO Recommendation #I: HUD should modify its one-for-one replacement
policy for Section 8 units.
The Department's response:
Under existing HUD policy, an owner with an existing contract for, say
100 units, will not be permitted to execute a renewal contract for
fewer units-even if the reduction would potentially permit project
modernization, increase the supply of large, family units, or otherwise
improve the financial feasibility of the project. As noted in the
report, the Department faces a great challenge in balancing the need to
preserve much needed affordable housing with the sometimes arbitrary
requests of property owners to reduce affordable units in their
properties. The Department recognizes that, in some instances, this
policy may lead to an owner's decision to opt out of the Section 8
program. The difficulty, however, is that revising this policy might
save one or two projects from opting out while at the same time lead to
a net loss of assisted units.
However, the Department is aware of the need for property owners to
create larger units by reducing overall units to accommodate the market
demand, especially in elderly housing projects. Therefore, the
Department is evaluating that policy to determine what criteria should
be established to approve such a request. As stated earlier, the
Department is very sensitive to the need for affordable housing units
in this country and will be very careful in developing a policy that
would reduce affordable units.
GAO Recommendation #2: HUD should address industry concerns for more
timely and better targeted OCAF adjustments.
The Department's response:
For the majority of Section 8 renewal contracts, annual rent increases
are awarded on the basis of Operating Cost Adjustment Factors (OCAF)
that are published at the State level and with a lag of approximately
eighteen months. The Department is aware of the industry's concerns
regarding the OCAF adjustments, the use of statewide methodology and
the inability to deal with emergency situations. Based on the
industry's concerns and the need to review the methodology since it has
not been revised since its origination, the Department has initiated a
review of the OCAF methodology. As part of the review, the Department
is looking at actual costs of the HUD portfolio to determine the
ramifications of the lag time and the use of the statewide data.
The Department has met with our industry partners to identify a number
of potential improvements to the OCAF process, including potentially
the publication of factors at a more localized level, more timely
publication, and even the introduction of a means by which owners can
obtain temporary relief in cases where sharp rises in operating cost
occur (e.g., the jump in insurance costs after Hurricane Katrina or
recent spikes in energy costs). The Department anticipates that the
review will be completed and the results announced by the end of fiscal
year 2007.
GAO Recommendation #3: HUD should determine if other "unclear and
burdensome" policies are contributing to owner opt outs.
The Department's response:
The Department is aware of the industry's concerns regarding late
subsidy payments, the administrative costs of managing Section 8
contracts with only a few units, outdated policies and procedures,
confusion over HUD requirements under its Limited English Proficiency
rule, and alleged inconsistencies in REAC inspections.
The Department acknowledges that Section 8 payments are late from time
to time and is continuing to look at ways to improve the payment
process. It is important to note that a major cause of late payments
each fiscal year is delays in enactment of our annual appropriation.
This Administration is committed to continue to improve the payment
process and provide periodic updates on our progress and improvements
to GAO and the Congress.
HUD has encouraged owners with more than one Section 8 contract to
combine their contracts as a way of improving efficient operation, but
the Department does acknowledge that projects with a small number of
assisted units face a relatively high administrative cost---since the
fraud prevention and compliance reporting requirements are the same for
all Section 8 projects regardless of size. Efforts to move assistance
from project to project have had only limited success, and the GAO
report does not contain any specific suggestions on how the
administrative costs for very small contracts could be reduced. It is
important that an owner provide resident data and information to
minimize improper payments and comply with certain requirements to
ensure that residents reside in decent, safe and sanitary housing.
However, the Department is always willing to look at recommendations
when presented to reduce the administrative costs and encourage the
continued participation of these projects in our program.
The Department has recently published clarifications with respect to
its Limited English Proficiency (LEP) requirements and we will continue
to work with our industry partners to assure that this policy can be
achieved in a sensible and cost-effective manner.
While the Department continues to hear of some cases where the physical
inspection scores provided under the REAL process are inconsistent or
factually incorrect, the Department is committed to the process and its
objective and statistically based methodology. This process is
important as HUD has an obligation to make certain that projects
receiving Federal assistance are maintained at the highest standard,
and that aggressive enforcement action is fully justified where owners
fail to offer "decent, safe and sanitary" housing to the low-income
families who benefit from our assistance. The implementation of this
process has resulted in having less than 300 properties in a portfolio
of over 33,00 projects with unsatisfactory physical scores. This
process is infinitely superior to any approach previously used by HUD.
We also note that the Department solicits feedback from owners and
managers on inspection inconsistencies and inspector misconduct, and
that a formal appeal process exists to address instances where the
owner disagrees with the results of the inspection.
In closing, the Department appreciates the cooperative manner in which
the GAO study was conducted and the opportunity to provide comments on
this draft report; and if additional information can be provided to
you, please contact Charles H. Williams, Deputy Assistant Secretary for
Multifamily Housing at (202) 708-2495.
Sincerely,
Signed by:
Brian D. Montgomery:
Assistant Secretary for Housing-Federal Housing-Commissioner:
[End of section]
Appendix III: Number of Opt-outs by State in Identified Census
Divisions:
East North Central Division.
State: ILLINOIS;
Total Eligible Properties: 496;
Total Property Opt-outs: 29;
Percentage of Opt-outs: 5.8%;
Total Unit Opt-outs: 1,381.
State: INDIANA;
Total Eligible Properties: 393;
Total Property Opt-outs: 21;
Percentage of Opt-outs: 5.3%;
Total Unit Opt-outs: 781.
State: MICHIGAN;
Total Eligible Properties: 409;
Total Property Opt-outs: 29;
Percentage of Opt-outs: 7.1%;
Total Unit Opt-outs: 1,859.
State: OHIO;
Total Eligible Properties: 940;
Total Property Opt-outs: 87;
Percentage of Opt-outs: 9.3%;
Total Unit Opt-outs: 3,768.
State: WISCONSIN;
Total Eligible Properties: 373;
Total Property Opt- outs: 26;
Percentage of Opt-outs: 7.0%;
Total Unit Opt-outs: 871.
East South Central Division.
State: ALABAMA;
Total Eligible Properties: 251;
Total Property Opt-outs: 18;
Percentage of Opt-outs: 7.2%;
Total Unit Opt-outs: 1,040.
State: KENTUCKY;
Total Eligible Properties: 360;
Total Property Opt-outs: 12;
Percentage of Opt-outs: 3.3%;
Total Unit Opt-outs: 310.
State: MISSISSIPPI;
Total Eligible Properties: 236;
Total Property Opt-outs: 2;
Percentage of Opt-outs: 0.8%;
Total Unit Opt-outs: 58.
State: TENNESSEE;
Total Eligible Properties: 301;
Total Property Opt- outs: 10;
Percentage of Opt-outs: 3.3%;
Total Unit Opt-outs: 301.
Middle Atlantic Division.
State: NEW JERSEY;
Total Eligible Properties: 299;
Total Property Opt-outs: 36;
Percentage of Opt-outs: 12.0%;
Total Unit Opt-outs: 512.
State: NEW YORK;
Total Eligible Properties: 843;
Total Property Opt-outs: 38;
Percentage of Opt-outs: 4.5%;
Total Unit Opt-outs: 3,108.
State: PENNSYLVANIA;
Total Eligible Properties: 494;
Total Property Opt-outs: 6;
Percentage of Opt-outs: 1.2%;
Total Unit Opt-outs: 127.
Mountain Division.
State: ARIZONA;
Total Eligible Properties: 99;
Total Property Opt-outs: 6;
Percentage of Opt-outs: 6.1%;
Total Unit Opt-outs: 431.
State: COLORADO;
Total Eligible Properties: 229;
Total Property Opt-outs: 17;
Percentage of Opt-outs: 7.4%;
Total Unit Opt-outs: 714.
State: IDAHO;
Total Eligible Properties: 60;
Total Property Opt-outs: 6;
Percentage of Opt-outs: 10.0%;
Total Unit Opt-outs: 194.
State: MONTANA;
Total Eligible Properties: 101;
Total Property Opt-outs: 1;
Percentage of Opt-outs: 1.0%;
Total Unit Opt-outs: 16.
State: NEVADA;
Total Eligible Properties: 48;
Total Property Opt-outs: 12;
Percentage of Opt-outs: 25.0%;
Total Unit Opt-outs: 374.
State: NEW MEXICO;
Total Eligible Properties: 78;
Total Property Opt-outs: 0;
Percentage of Opt-outs: 0.0%;
Total Unit Opt-outs: N/A.
State: UTAH;
Total Eligible Properties: 77;
Total Property Opt-outs: 0;
Percentage of Opt-outs: 0.0%;
Total Unit Opt-outs: N/A.
State: WYOMING;
Total Eligible Properties: 55;
Total Property Opt-outs: 0;
Percentage of Opt-outs: 0.0%;
Total Unit Opt-outs: N/A.
New England Division.
State: CONNECTICUT;
Total Eligible Properties: 180;
Total Property Opt-outs: 9;
Percentage of Opt-outs: 5.0%;
Total Unit Opt-outs: 787.
State: MAINE;
Total Eligible Properties: 103;
Total Property Opt-outs: 3;
Percentage of Opt-outs: 2.9%;
Total Unit Opt-outs: 39.
State: MASSACHUSETTS;
Total Eligible Properties: 379;
Total Property Opt-outs: 5;
Percentage of Opt-outs: 1.3%;
Total Unit Opt-outs: 129.
State: NEW HAMPSHIRE;
Total Eligible Properties: 84;
Total Property Opt-outs: 5;
Percentage of Opt-outs: 6.0%;
Total Unit Opt-outs: 163.
State: RHODE ISLAND;
Total Eligible Properties: 129;
Total Property Opt-outs: 5;
Percentage of Opt-outs: 3.9%;
Total Unit Opt-outs: 124.
State: VERMONT;
Total Eligible Properties: 49;
Total Property Opt-outs: 0;
Percentage of Opt-outs: 0.0%;
Total Unit Opt-outs: N/A.
Pacific Division.
State: ALASKA;
Total Eligible Properties: 22;
Total Property Opt-outs: 2;
Percentage of Opt-outs: 9.1%;
Total Unit Opt-outs: 63.
State: CALIFORNIA;
Total Eligible Properties: 1,250;
Total Property Opt-outs: 89;
Percentage of Opt-outs: 7.1%;
Total Unit Opt-outs: 3,095.
State: HAWAII;
Total Eligible Properties: 58;
Total Property Opt-outs: 9;
Percentage of Opt-outs: 15.5%;
Total Unit Opt-outs: 259.
State: OREGON;
Total Eligible Properties: 150;
Total Property Opt-outs: 7;
Percentage of Opt-outs: 4.7%;
Total Unit Opt-outs: 112.
State: WASHINGTON;
Total Eligible Properties: 347;
Total Property Opt- outs: 19;
Percentage of Opt-outs: 5.5%;
Total Unit Opt-outs: 520.
South Atlantic Division.
State: DELAWARE;
Total Eligible Properties: 22;
Total Property Opt-outs: 0;
Percentage of Opt-outs: 0.0%;
Total Unit Opt-outs: N/A.
State: DISTRICT OF COLUMBIA;
Total Eligible Properties: 102;
Total Property Opt-outs: 14;
Percentage of Opt-outs: 13.7%;
Total Unit Opt-outs: 312.
State: FLORIDA;
Total Eligible Properties: 378;
Total Property Opt-outs: 13;
Percentage of Opt-outs: 3.4%;
Total Unit Opt-outs: 598.
State: GEORGIA;
Total Eligible Properties: 302;
Total Property Opt-outs: 31;
Percentage of Opt-outs: 10.3%;
Total Unit Opt-outs: 1,577.
State: MARYLAND;
Total Eligible Properties: 293;
Total Property Opt-outs: 39;
Percentage of Opt-outs: 13.3%;
Total Unit Opt-outs: 2,036.
State: NORTH CAROLINA;
Total Eligible Properties: 480;
Total Property Opt-outs: 15;
Percentage of Opt-outs: 3.1%;
Total Unit Opt-outs: 428.
State: SOUTH CAROLINA;
Total Eligible Properties: 233;
Total Property Opt-outs: 12;
Percentage of Opt-outs: 5.2%;
Total Unit Opt-outs: 317.
State: VIRGINIA;
Total Eligible Properties: 209;
Total Property Opt-outs: 22;
Percentage of Opt-outs: 10.5%;
Total Unit Opt-outs: 1,827.
State: WEST VIRGINIA;
Total Eligible Properties: 121;
Total Property Opt- outs: 3;
Percentage of Opt-outs: 2.5%;
Total Unit Opt-outs: 55.
West North Central Division.
State: IOWA;
Total Eligible Properties: 255;
Total Property Opt-outs: 35;
Percentage of Opt-outs: 13.7%;
Total Unit Opt-outs: 967.
State: KANSAS;
Total Eligible Properties: 227;
Total Property Opt-outs: 7;
Percentage of Opt-outs: 3.1%;
Total Unit Opt-outs: 261.
State: MINNESOTA;
Total Eligible Properties: 325;
Total Property Opt-outs: 11;
Percentage of Opt-outs: 3.4%;
Total Unit Opt-outs: 232.
State: MISSOURI;
Total Eligible Properties: 372;
Total Property Opt-outs: 11;
Percentage of Opt-outs: 3.0%;
Total Unit Opt-outs: 425.
State: NEBRASKA;
Total Eligible Properties: 166;
Total Property Opt-outs: 4;
Percentage of Opt-outs: 2.4%;
Total Unit Opt-outs: 34.
State: NORTH DAKOTA;
Total Eligible Properties: 148;
Total Property Opt-outs: 17;
Percentage of Opt-outs: 11.5%;
Total Unit Opt-outs: 362.
State: SOUTH DAKOTA;
Total Eligible Properties: 120;
Total Property Opt- outs: 3;
Percentage of Opt-outs: 2.5%;
Total Unit Opt-outs: 70.
West South Central Division;
State: ARKANSAS;
Total Eligible Properties: 178;
Total Property Opt-outs: 7;
Percentage of Opt-outs: 3.9%;
Total Unit Opt-outs: 136.
State: LOUISIANA;
Total Eligible Properties: 164;
Total Property Opt-outs: 3;
Percentage of Opt-outs: 1.8%;
Total Unit Opt-outs: 178.
State: OKLAHOMA;
Total Eligible Properties: 146;
Total Property Opt-outs: 2;
Percentage of Opt-outs: 1.4%;
Total Unit Opt-outs: 322.
State: TEXAS;
Total Eligible Properties: 543;
Total Property Opt-outs: 48;
Percentage of Opt-outs: 8.8%;
Total Unit Opt-outs: 2,492.
No Regional Designation.
State: GUAM;
Total Eligible Properties: 1;
Total Property Opt-outs: 0;
Percentage of Opt-outs: 0.0%;
Total Unit Opt-outs: N/A.
State: MICRONESIA;
Total Eligible Properties: 2;
Total Property Opt-outs: 2;
Percentage of Opt-outs: 100.0%;
Total Unit Opt-outs: 11.
State: N MARIANAS;
Total Eligible Properties: 4;
Total Property Opt-outs: 0;
Percentage of Opt-outs: 0.0%;
Total Unit Opt-outs: N/A.
State: PUERTO RICO;
Total Eligible Properties: 155;
Total Property Opt-outs: 16;
Percentage of Opt-outs: 10.3%;
Total Unit Opt-outs: 1,396.
State: State: VIRGIN ISLANDS;
Total Eligible Properties: State: 8;
Total Property Opt-outs: State: 0;
Percentage of Opt-outs: State: 0.0%;
Total Unit Opt-outs: State: N/A.
Total Eligible Properties: 13,847;
Total Property Opt-outs: 824;
Percentage of Opt-outs: 6.0%;
Total Unit Opt-outs: 35,172.
Source: GAO analysis of HUD data.
[End of table]
[End of section]
Appendix IV: Number of Opt-outs by Metropolitan Area for the 3 Census
Divisions with the Highest Percentage of Opt-outs:
East North Central Division.
State: ILLINOIS;
Metro Area: CHICAGO IL;
Number Properties: 26;
Number Units: 1,209.
State: ILLINOIS;
Metro Area: DAVENPORT-MOLINE-ROCK ISLAND IA-IL;
Number Properties: 1;
Number Units: 76.
State: ILLINOIS;
Metro Area: NOT IN METRO AREA;
Number Properties: 1;
Number Units: 48.
State: ILLINOIS;
Metro Area: PEORIA-PEKIN IL;
Number Properties: 1;
Number Units: 48.
State: INDIANA;
Metro Area: BLOOMINGTON IN;
Number Properties: 1;
Number Units: 27.
State: INDIANA;
Metro Area: EVANSVILLE-HENDERSON IN-KY;
Number Properties: 1;
Number Units: 40.
State: INDIANA;
Metro Area: FORT WAYNE IN;
Number Properties: 1;
Number Units: 94.
State: INDIANA;
Metro Area: GARY IN;
Number Properties: 1;
Number Units: 65.
State: INDIANA;
Metro Area: INDIANAPOLIS IN;
Number Properties: 12;
Number Units: 348.
State: INDIANA;
Metro Area: LAFAYETTE IN;
Number Properties: 1;
Number Units: 79.
State: INDIANA;
Metro Area: LOUISVILLE KY-IN;
Number Properties: 1;
Number Units: 65.
State: INDIANA;
Metro Area: NOT IN METRO AREA;
Number Properties: 3;
Number Units: 63.
State: MICHIGAN;
Metro Area: ANN ARBOR MI;
Number Properties: 2;
Number Units: 394.
State: MICHIGAN;
Metro Area: DETROIT MI;
Number Properties: 17;
Number Units: 1,191.
State: MICHIGAN;
Metro Area: FLINT MI;
Number Properties: 1;
Number Units: 33.
State: MICHIGAN;
Metro Area: GRAND RAPIDS-MUSKEGON- HOLLAND MI;
Number Properties: 3;
Number Units: 75.
State: MICHIGAN;
Metro Area: JACKSON MI;
Number Properties: 1;
Number Units: 19.
State: MICHIGAN;
Metro Area: KALAMAZOO-BATTLE CREEK MI;
Number Properties: 2;
Number Units: 58.
State: MICHIGAN;
Metro Area: LANSING-EAST LANSING MI;
Number Properties: 1;
Number Units: 23.
State: MICHIGAN;
Metro Area: NOT IN METRO AREA;
Number Properties: 2;
Number Units: 66.
State: OHIO;
Metro Area: AKRON OH;
Number Properties: 5;
Number Units: 145.
State: OHIO;
Metro Area: CINCINNATI OH-KY-IN;
Number Properties: 46;
Number Units: 1,397.
State: OHIO;
Metro Area: CLEVELAND-LORAIN-ELYRIA OH;
Number Properties: 11;
Number Units: 702.
State: OHIO;
Metro Area: COLUMBUS OH;
Number Properties: 7;
Number Units: 204.
State: OHIO;
Metro Area: DAYTON-SPRINGFIELD OH;
Number Properties: 4;
Number Units: 426.
State: OHIO;
Metro Area: MANSFIELD OH;
Number Properties: 1;
Number Units: 32.
State: OHIO;
Metro Area: NOT IN METRO AREA;
Number Properties: 11;
Number Units: 728.
State: OHIO;
Metro Area: TOLEDO OH;
Number Properties: 1;
Number Units: 34.
State: OHIO;
Metro Area: YOUNGSTOWN-WARREN OH;
Number Properties: 1;
Number Units: 100.
State: WISCONSIN;
Metro Area: EAU CLAIRE WI;
Number Properties: 1;
Number Units: 21.
State: WISCONSIN;
Metro Area: MADISON WI;
Number Properties: 3;
Number Units: 118.
State: WISCONSIN;
Metro Area: MILWAUKEE-WAUKESHA WI;
Number Properties: 11;
Number Units: 422.
State: WISCONSIN;
Metro Area: MINNEAPOLIS-ST. PAUL MN- WI;
Number Properties: 1;
Number Units: 6.
State: WISCONSIN;
Metro Area: NOT IN METRO AREA;
Number Properties: 9;
Number Units: 246.
State: WISCONSIN;
Metro Area: WAUSAU WI;
Number Properties: 1;
Number Units: 58.
Pacific Division.
State: ALASKA;
Metro Area: NOT IN METRO AREA;
Number Properties: 2;
Number Units: 63.
State: CALIFORNIA;
Metro Area: BAKERSFIELD CA;
Number Properties: 2;
Number Units: 39.
State: CALIFORNIA;
Metro Area: CHICO-PARADISE CA;
Number Properties: 3;
Number Units: 77.
State: CALIFORNIA;
Metro Area: FRESNO CA;
Number Properties: 5;
Number Units: 272.
State: CALIFORNIA;
Metro Area: LOS ANGELES-LONG BEACH CA;
Number Properties: 16;
Number Units: 580.
State: CALIFORNIA;
Metro Area: MODESTO CA;
Number Properties: 1;
Number Units: 44.
State: CALIFORNIA;
Metro Area: NOT IN METRO AREA;
Number Properties: 3;
Number Units: 15.
State: CALIFORNIA;
Metro Area: OAKLAND CA;
Number Properties: 9;
Number Units: 431.
State: CALIFORNIA;
Metro Area: ORANGE COUNTY CA;
Number Properties: 3;
Number Units: 179.
State: CALIFORNIA;
Metro Area: REDDING CA;
Number Properties: 1;
Number Units: 48.
State: CALIFORNIA;
Metro Area: RIVERSIDE-SAN BERNARDINO CA;
Number Properties: 4;
Number Units: 206.
State: CALIFORNIA;
Metro Area: SACRAMENTO CA;
Number Properties: 20;
Number Units: 428.
State: CALIFORNIA;
Metro Area: SAN DIEGO CA;
Number Properties: 3;
Number Units: 176.
State: CALIFORNIA;
Metro Area: SAN JOSE CA;
Number Properties: 1;
Number Units: 79.
State: CALIFORNIA;
Metro Area: SAN LUIS OBISPO- ATASCADERO-PASO ROBLES CA;
Number Properties: 1;
Number Units: 22.
State: CALIFORNIA;
Metro Area: SANTA CRUZ-WATSONVILLE CA;
Number Properties: 1;
Number Units: 110.
State: CALIFORNIA;
Metro Area: SANTA ROSA CA;
Number Properties: 3;
Number Units: 134.
State: CALIFORNIA;
Metro Area: STOCKTON-LODI CA;
Number Properties: 4;
Number Units: 101.
State: CALIFORNIA;
Metro Area: VALLEJO-FAIRFIELD-NAPA CA;
Number Properties: 4;
Number Units: 78.
State: CALIFORNIA;
Metro Area: YOLO CA;
Number Properties: 4;
Number Units: 52.
State: CALIFORNIA;
Metro Area: YUBA CITY CA;
Number Properties: 1;
Number Units: 24.
State: HAWAII;
Metro Area: HONOLULU HI;
Number Properties: 8;
Number Units: 159.
State: HAWAII;
Metro Area: NOT IN METRO AREA;
Number Properties: 1;
Number Units: 100.
State: OREGON;
Metro Area: NOT IN METRO AREA;
Number Properties: 3;
Number Units: 17.
State: OREGON;
Metro Area: PORTLAND-VANCOUVER OR-WA;
Number Properties: 3;
Number Units: 87.
State: OREGON;
Metro Area: SALEM OR;
Number Properties: 1;
Number Units: 8.
State: WASHINGTON;
Metro Area: BREMERTON WA;
Number Properties: 3;
Number Units: 89.
State: WASHINGTON;
Metro Area: NOT IN METRO AREA;
Number Properties: 3;
Number Units: 75.
State: WASHINGTON;
Metro Area: OLYMPIA WA;
Number Properties: 2;
Number Units: 69.
State: WASHINGTON;
Metro Area: PORTLAND-VANCOUVER OR- WA;
Number Properties: 1;
Number Units: 24.
State: WASHINGTON;
Metro Area: SEATTLE-BELLEVUE- EVERETT WA;
Number Properties: 6;
Number Units: 140.
State: WASHINGTON;
Metro Area: SPOKANE WA;
Number Properties: 2;
Number Units: 72.
State: WASHINGTON;
Metro Area: TACOMA WA;
Number Properties: 2;
Number Units: 51.
South Atlantic Division.
State: DISTRICT OF COLUMBIA;
Metro Area: WASHINGTON DC-MD-VA-WV;
Number Properties: 14;
Number Units: 312.
State: FLORIDA;
Metro Area: FORT LAUDERDALE FL;
Number Properties: 2;
Number Units: 166.
State: FLORIDA;
Metro Area: FORT MYERS-CAPE CORAL FL;
Number Properties: 1;
Number Units: 30.
State: FLORIDA;
Metro Area: JACKSONVILLE FL;
Number Properties: 1;
Number Units: 24.
State: FLORIDA;
Metro Area: MIAMI FL;
Number Properties: 1;
Number Units: 48.
State: FLORIDA;
Metro Area: NOT IN METRO AREA;
Number Properties: 1;
Number Units: 5.
State: FLORIDA;
Metro Area: ORLANDO FL;
Number Properties: 3;
Number Units: 48.
State: FLORIDA;
Metro Area: PENSACOLA FL;
Number Properties: 1;
Number Units: 200.
State: FLORIDA;
Metro Area: SARASOTA-BRADENTON FL;
Number Properties: 1;
Number Units: 36.
State: FLORIDA;
Metro Area: TAMPA-ST. PETERSBURG- CLEARWATER FL;
Number Properties: 2;
Number Units: 41.
State: GEORGIA;
Metro Area: ATHENS GA;
Number Properties: 2;
Number Units: 19.
State: GEORGIA;
Metro Area: ATLANTA GA;
Number Properties: 21;
Number Units: 1,445.
State: GEORGIA;
Metro Area: NOT IN METRO AREA;
Number Properties: 1;
Number Units: 8.
State: GEORGIA;
Metro Area: SAVANNAH GA;
Number Properties: 7;
Number Units: 105.
State: MARYLAND;
Metro Area: BALTIMORE MD;
Number Properties: 21;
Number Units: 961.
State: MARYLAND;
Metro Area: COLUMBIA;
Number Properties: 1;
Number Units: 35.
State: MARYLAND;
Metro Area: HAGERSTOWN MD;
Number Properties: 3;
Number Units: 141.
State: MARYLAND;
Metro Area: WASHINGTON DC-MD-VA-WV;
Number Properties: 14;
Number Units: 899.
State: NORTH CAROLINA;
Metro Area: CHARLOTTE-GASTONIA- ROCK HILL NC-SC;
Number Properties: 1;
Number Units: 100.
State: NORTH CAROLINA;
Metro Area: GREENSBORO--WINSTON- SALEM--HIGH POINT NC;
Number Properties: 4;
Number Units: 132.
State: NORTH CAROLINA;
Metro Area: NOT IN METRO AREA;
Number Properties: 4;
Number Units: 37.
State: NORTH CAROLINA;
Metro Area: RALEIGH-DURHAM- CHAPEL HILL NC;
Number Properties: 6;
Number Units: 159.
State: SOUTH CAROLINA;
Metro Area: AUGUSTA-AIKEN GA-SC;
Number Properties: 1;
Number Units: 26.
State: SOUTH CAROLINA;
Metro Area: CHARLESTON-NORTH CHARLESTON SC;
Number Properties: 2;
Number Units: 24.
State: SOUTH CAROLINA;
Metro Area: COLUMBIA SC;
Number Properties: 2;
Number Units: 56.
State: SOUTH CAROLINA;
Metro Area: GREENVILLE- SPARTANBURG-ANDERSON SC;
Number Properties: 4;
Number Units: 61.
State: SOUTH CAROLINA;
Metro Area: NOT IN METRO AREA;
Number Properties: 2;
Number Units: 38.
State: SOUTH CAROLINA;
Metro Area: SUMTER SC;
Number Properties: 1;
Number Units: 112.
State: VIRGINIA;
Metro Area: LYNCHBURG VA;
Number Properties: 1;
Number Units: 149.
State: VIRGINIA;
Metro Area: NORFOLK-VIRGINIA BEACH- NEWPORT NEWS VA-NC;
Number Properties: 8;
Number Units: 567.
State: VIRGINIA;
Metro Area: NOT IN METRO AREA;
Number Properties: 4;
Number Units: 369.
State: VIRGINIA;
Metro Area: RICHMOND-PETERSBURG VA;
Number Properties: 3;
Number Units: 565.
State: VIRGINIA;
Metro Area: WASHINGTON DC-MD-VA-WV;
Number Properties: 6;
Number Units: 177.
State: WEST VIRGINIA;
Metro Area: CHARLESTON WV;
Number Properties: 1;
Number Units: 23.
State: WEST VIRGINIA;
Metro Area: NOT IN METRO AREA;
Number Properties: 1;
Number Units: 8.
State: State: WEST VIRGINIA;
Metro Area: State: PARKERSBURG-MARIETTA WV-OH;
Number Properties: State: 1;
Number Units: State: 24.
Number Properties: Properties: 467;
Number Units: 19,859.
Source: GAO analysis of HUD data.
[End of table]
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Orice M. Williams, (202) 512-8678, williamso@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Andy Finkel, Assistant
Director; Grace Haskins, Michelle Bracy, Emily Chalmers, Mark Egger,
Charlene Johnson, Alison Martin, John McGrail, Marc Molino, and Roberto
Piņero made key contributions to this report.
FOOTNOTES
[1] The project-based section 8 program was authorized by the Housing
and Community Development Act of 1974, Pub. L. 93-383, and comprises
several subprograms that provide rental assistance.
[2] REMS includes historical information on all properties in HUD's
multifamily portfolio, including data on project-based Section 8
properties and contracts. One Section 8 property may have multiple
contracts.
[3] Econometrica, Inc., Multifamily Properties: Opting In, Opting Out
and Remaining Affordable, HUD Contract no. GS-10F-0269K (Washington,
D.C.: January 2006).
[4] Housing Finance Agencies are state-chartered authorities
established to help meet the affordable housing needs of residents of
their states. They serve as lenders and resource providers.
[5] Terminations include opt outs, foreclosures, and enforcements.
[6] These numbers reflect all contracts that were processed for renewal
during fiscal year 2001-2005 and were still active at the end of the
reporting period. They cover contracts that had been renewed prior to
fiscal year 2001, but were renewed again from 2001 through 2005, as
well as contracts that expired for the first time during this period.
[7] Prior to 1991, the Section 202 program provided direct loans at
below-market rates for up to 40 years to finance the construction of
rental housing for low-income elderly and persons with disabilities.
[8] In 1978, a moderate rehabilitation portion of the Section 8 program
was added but has not been funded since 1989. The authorization for the
new construction and substantial rehabilitation components of the
Housing and Community Development Act of 1974 were repealed in 1983.
[9] The Section 8 Renewal Guide provides comprehensive guidance for
renewing expiring project-based Section 8 contracts.
[10] In general, Section 8 exception projects are those projects with
project-based Section 8 rental assistance, but without FHA mortgage
insurance. Owners of exception projects may maintain above-market rents
if justified on a cost basis.
[11] Preservation projects are those projects maintained as affordable
housing under the Emergency Low Income Housing Preservation Act of 1987
(ELIPHRA) and the Low Income Housing Preservation and Resident Home
Ownership Act of 1990 (LIHPRA). The Portfolio Reengineering
Demonstration program was the predecessor to the Mark-to-Market
program.
[12] To protect Section 8 households from rent increases that may
result when owners opt out of their contracts or prepay their
subsidized mortgages, HUD provides a special type of tenant protection
voucher known as an enhanced voucher. Rents are set at market
comparable levels, instead of the regular voucher payment standard. A
tenant with an enhanced voucher is entitled to remain in his unit as
long as the property remains a rental property, provided the rent is
reasonable.
[13] The PAE is responsible for structuring Mark-to-Market
transactions, under contract with HUD. PAEs may be public or private
entities or joint ventures.
[14] See GAO, Multifamily Housing: More Accessible Data Could Help
Efforts to Preserve Housing for Low Income Tenants, GAO-04-20,
(Washington, D.C.: Jan. 23, 2004).
[15] The American Homeownership and Economic Opportunity Act of 2000
(Pub. L. 106-569; 12 U.S.C.1701q note) provides the authority for HUD
to allow higher than market Section 8 rents in connection with the
refinancing of the underlying Section 202 mortgage. According to HUD
officials, this act has improved the program's operations, including
better meeting the long-term needs of the elderly and people with
disabilities served.
[16] Although HUD's analysis deals strictly with contracts, the
remainder of this report section focuses on the 13,847 properties
covered by the 14,373 contracts analyzed in the previous section
because, from a policy perspective, property counts serve as a better
indication of the supply of available housing for low-income tenants
because a single property can have multiple contracts.
[17] HUD considers REAC physical inspection scores of 60 and above to
be passing.
[18] There are a few exceptions to this rule, such as HUD-insured
mortgages financed by state or local agencies where a restructuring
plan conflicts with laws or regulations governing such financing.
[19] Pub. L. 110-5.
[20] H.R. 647 and S. 131.
[21] LIHTC is an indirect federal subsidy used to finance the
development of affordable rental housing for low-income households.
LIHTC is an IRS program based on Section 42 of the Internal Revenue
Code and was enacted by Congress in 1986 to provide the private market
with an incentive to invest in affordable rental housing.
[22] LIHTC recipients must commit to one of two possible low-income
threshold requirements. Owners must commit to renting at least 20
percent of the units to households with incomes at or below 50 percent
of the HUD-established area median income or commit to renting at least
40 percent of units to households at or below 60 percent of the HUD-
established area median income.
[23] The nine expense categories that HUD takes into account when
determining the OCAF adjustments are wages, employee benefits, property
taxes, insurance, supplies and equipment, fuel oil, electricity,
natural gas, and water and sewer.
[24] The "Recognized Increased Cost" (RIC) initiative was developed by
NAHMA and a coalition of eight organizations, with the help of the
consulting firm Recapitalization Advisors, Inc.
[25] See GAO, Project-Based Rental Assistance: HUD Should Streamline
Its Processes to Ensure Timely Housing Assistance Payments, GAO-06-57
(Washington, D.C.: Nov. 15, 2005).
[26] These were Chicago, Illinois; Columbus Ohio; Houston, Texas; Los
Angeles, California; and New York, New York (The Bronx).
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site.
To have GAO e-mail you a list of newly posted products every afternoon,
go to www.gao.gov and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125
Washington, D.C. 20548:
Public Affairs:
Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548:
