section8renewalpolicyguidebook832015.pdf

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

WASHINGTON, DC 20410-8000

OFFICE OF HOUSING

www.hud.gov espanol.hud.gov

SPECIAL ATTENTION OF:

Regional Center and Satellite Office Directors, Account Executives; PBCAs;

Owners; and Management Agents

TRANSMITTAL

Section 8 Renewal Policy Guidebook Issued: 8/3/2015 Effective 11/1/15

A. Purpose.

This transmittal updates the Section 8 Renewal Policy guidebook. The revisions are being published on August 3, 2015. This guidance will apply to renewal and amend rent packages received by the Department (or post-marked) 90 days after the publish date.

B. Explanation of Changes.

The body of the guidebook contains stars (*) to indicate where specific text has been revised. Chapter Two and Chapter 16 have been completely revised and do not contain stars (*) to indicate specific changes in the text. Beyond grammatical revisions, major changes:

1. Remove repetitive language that applies to more than one renewal option and incorporates that text into an expanded Chapter Two.

2. Provide for terminating a non- Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) contract early if the owner agrees to: renew under Options One, Two, Three or Four; renew for 20 years plus the remaining balance on the terminated non-MAHRA contract; and agrees to sign the “Rider to the Original Section 8 Housing Assistance Payments Contract (HUD-93184).”

(Section 2-4.A)

3. Allow Option Five contracts to terminate early and renew under Option Five.

(Section 2-4.B.4)

4. Indicate that contracts eligible for the Auto OCAF will have the RCS adjusted automatically and the adjustment factor will be the OCAF. (Section 2-5.D)

5. Require those seeking to terminate a contract and renew it or those seeking to renew a contract for more than five years to obtain a new RCS. Also do not require an owner with an RCS that expires prior to a multiyear contracts five-year life cycle to obtain a new RCS until the fifth year of the contact, under certain conditions.

(Section 2-5 E.3)

6. Discuss the term of the Section 8 contracts and the ability to use 20-year contracts.

In addition, the Regional Center Director’s approval is no longer required for multiyear contracts. (Section 2-7.A)

7. Clarify that a Contract Administrator (CA) can renew a contract for up to five years but any renewal for more than five years must be referred to the Account Executive (AE) for review. (Section 2-7.A.1)

8. Indicate that the minimum contract term is one year except for MUTM contracts that require a five-year minimum term. (Section 2-7.A.2)

9. Indicate that owners can ask for an extension of the use agreement to facilitate a preservation transaction. (Section 2-7.A.3)

10. Add language that tells the AE/CA not to use the prorated-OCAF for short-term renewals under Option One, Two, or Three but to provide retroactive rent increases upon completing of contract renewal processing. (Section 2-9.C)

11. Refer users to a September 18, 2014 memorandum for instructions on how to combine Section 8 HAP contracts. (Section 2-10)

12. Add language that LMSA, Pension Fund, and Property Disposition contracts, in addition to old regulation contracts, typically have no limitations on distributions.

(Section 2-12.A.1)

13. Add language that says that users must follow the guidance in Housing Notice 2015-04 when developing utility allowances. (Section 2-17.A.2.b)

14. Highlight that HUD will not accept the RHS utility allowance calculation unless it developed in accordance with Housing Notice 2015-04. ( Note after Section 2-17.A.3.g)

15. Clarify that if an owner checks the box on HUD 9626 or 9627 requesting a “0” budget based rent adjustment, then no budget submission is necessary.

(Section 2-17.B.3.b)

16. Add language that allows for-profit and non-profit owners renewing under Option Two access to increased distributions if the owner signs a 20 year HAP contract.

(Section 2-12.D.1.a.2)

17. Add text that material FASS findings must be closed in order to qualify for increased distributions. (Section 2-12.E.1.a)

18. Add language that should an owner cease to be eligible for increased distributions the AE should follow the guidance in HUD Handbook 4370.2 Chapter 2.

(Section 2-12.E.2)

19. Provide modifications to Chapter 7 of Handbook 4350.1 concerning budget-based rent increases for MAHRA contracts. (Section 2-15)

i. No longer allow a 2 percent contingency reserve for projects owned by nonprofits or those projects once owned by nonprofits but which have been sold to limited dividend partnerships (Section 2-15 A.1).

ii. Allow nonprofit owned projects with 100 percent Section 8 to include a vacancy rate of 3 percent in the budget unless a lender requires a different number. (Section 2-15.A.2)

iii. Allow small projects to include a vacancy loss rate of 5 percent and partially-assisted project to use a vacancy loss rate of 7 percent in the budget submission. (Section 2-15 A.2.a and b)

v. Allow debt service coverage in a budget-based rent adjustment request but if not used for project purposes the amount must revert to the residual receipts account if the project is required to have a residual receipts account. (Note after 2-15 B)

vi. Allow projects with low income housing tax credits to include in their budget certain fees associated with the tax credit transaction. (Section 2- 15.C)

20. Allow owners to request zero budget-based rent adjustments. (Section 2-15-D)

21. Allow owners of Option Four projects who submit a zero budget-based rent adjustments to do so without a Rent Comparability Study (RCS). Allow owners of Section 515/8 projects who submit budgets that result in rents that will be less than the OCAF adjustment to do so without a RCS. (Section 2-15. F)

22. Add language that if rents are adjusted by the OCAF, then deposits to the replacement for reserve account are to be adjusted by the OCAF.

(Note after Section 2-16)

23. Add that users must follow the guidance in any HUD notices as well as Housing regulations in developing utility allowances. (Section 2-17.A.2.b)

24. Add new section that reminds the AE/CA that they must verify that owners are not suspended or debarred. (Section 2-17.A.3.b)

25. Highlight that HUD does not accept the RHS utility allowance calculation and that owners must submit the UA using HUD standards. (Note after Section 2-17.A.3.g)

26. Incorporate previously published language indicating that if a contract or amended rents record expires on September 30, the last day of the fiscal year, the effective date of the new contract or amend rents record is October 1, the first day of the new fiscal year. (Section 2-17.A.3.h.4)

27. Add language describing the procedure for the AutoOCAF. (Section 2-17.B)

28. Clarify that Section 245 Tenant Notifications are not required for OCAF rent adjustments but are required for budget-based rent adjustments or for any adjustment where the utility analysis results in a possible decrease in the utility allowance.

(Section 2-17.C.1)

29. Clarify that if an owner checks the box on HUD 9626 or 9627 requesting a “0” budget based rent adjustment, then no budget submission is necessary.

(Section 2-17.B.3.b)

30. Provide information on processing of regulatory and directive waivers.

(Section 2-18)

31. Require that all owners must register with Dun and Bradstreet and obtain a DUNS number. (Section 2-19)

32. Clarify that certain qualifying criteria apply to all projects but other criteria only to projects attempting to renew under Option One A.(Section 3-2 and Section 3-3)

33. Clarify that a limited-distribution entity can qualify to renew under MUTM.

(Section 3-2 D.1.a)

34. Clarify that a nonprofit-controlled for-profit can renew under MUTM.

(Note after Section 3-2.D.1.a)

35. Require that management have a “Satisfactory” or above score to qualify for MUTM. (Section 3-2.B.1)

36. Clarify that a housing authority occupying the status of a “public body corporate and politic” would qualify to participate in MUTM. (Section 3-2.D.1.b)

37. Reemphasize that properties with most use restrictions are not eligible for Option

One-A. (Section 3-3.B)

38. Clarify that the 150 percent of FMR cap only applies to Option One-A. To exceed the 150 percent cap, the property must meet the criteria found in Section 3-6.B. (Section 3-5)

39. Clarify that the “vulnerable population” criteria for Option One B applies only to the assisted units not the entire project and is inclusive of all three categories.

(Section 3-6.B.1)

40. Clarify that in order to meet the low vacancy criteria for Option One B that the rental vacancy rate is three percent or less. (Section 3-6.B.2)

41. Add language that receipt of tax credit allocations can qualify as “community support” for purposes of qualifying for Option One B. (Section 3-6.B.3)

42. Add language that allows the termination of a non-MAHRA contract at any time in order to participate in MUTM with certain conditions. (Section 3-7.A.2)

43. Add language that Full M2M, Rental Assistance Demonstration (RAD), and DEMO contracts cannot be terminated early in order to renew under MUTM.

(Section 3-7.C and Section 3-7.D)

44. Eliminate language that requires a HUD RCS for MUTM contract renewals (Section 3-8.A) and substitutes a requirement that HUD will hire a third-party appraiser to complete a HUD RCS should rents in the owner’s RCS exceed 140 percent of the Median Gross Rent By Zip Code Tabulation Area. (Section 9-23)

45. Clarify that as part of a Chapter 15 transaction, the “as is” rent determination in the RCS is used to determine eligibility for MUTM (Section 3-8.A)

46. Add language that should a property not qualify for Option One A that the owner has the option to request renewal under Option One B. If the project does not qualify for Option One A or B that the Owner can request a contract renewal under any other option for which it qualifies . (Section 3-8.B.1 and Section 3-8.B.2)

47. Remove the requirement, formerly found in Section 3-8A, that comparable rents should be reduced by the Interest Subsidy Adjustment Factor for Section 236, 221(d)(3) and 515 properties (Chapter 3).

48. Clarify that owners with contracts that exceed five years must follow the instructions in Section 2-17.C.4. concerning fifth year rent adjustments.

(Section 3-9.B)

49. Clarify that if the contract’s aggregate rents are at or below market the project can qualify for Option Two even if the rents on one particular bedroom size exceeds market. (Section 4-1.A)

50. Specify that owners of projects renewing under Option Two can include both non-profit and for profit entities and that in a transfer the requirements apply to the purchaser. (Section 4-1.B)

51. Clarify that at the time of renewal, rents can be adjusted by the OCAF or a budget-based rent adjustment limited by market. (Section 4-2.B)

52. Replace the name “OAHP” with “Recap” throughout the chapter.

53. Add that authorization for referral to Recap for restructuring sunsets October 1, 2017, unless subsequently extended. (Section 5-1.A)

54. Clarify definition of “once eligible, always eligible” for restructuring, even if current rent is at or below market. (Section 5-1.B)

55. Add information on a 202 project and its eligibility for restructuring if refinanced a second time with a loan insured under the National Housing Act.

(Section 5-1.H)

56. Clarify that post-M2M, a project is under a Section 8 HAP contract that is limited to OCAF rent adjustments, whether under a single 20-year contract, or multiple shorter term contracts, for a period of 20 years. (Section 5-4.A.2)

57. Add detail on subsequent renewals, i.e., what happens when the initial 20 years post-M2M are complete, or in the case of a mutually agreed upon termination and early renewal. (Section 5-5.A, Section 5-5.B, and Section 5-5.C)

58. Incorporate information from prior appendices into the body of the chapter, and eliminates the appendices in Chapter Five.

59. Clarify that a project may renew under Option Four if the project is exempt from debt-restructuring or does not meet the definition of an “eligible multifamily housing project.” (Section 6-1)

60. Clarify that a state or local government-financed project that is not insured under the National Housing Act is not subject to review by Recap (Note after Section 6-1.A)

61. Clarify that a RCS is not required if the owner is seeking a “$0” budget based rent adjustment (Section 6-3.A.2.a)

62. Add that 202 projects that have refinanced for the first time retain their exemption from restructuring. (Section 6-1.A.3)

63. Add projects financed under Section 542(c) risk-sharing with qualified State and local housing finance agencies to the list of projects exempt from MTM.

(Section 6-1.B.1)

64. Clarify that debt service to be included in a budget submission can include the debt service associated with the new loan if the renewal is part of a refinancing transaction. (Note after 6-2.A)

65. Clarify that there is no “lesser of” test at the time of the annual rent adjustment for a multiyear contract in Option Four. (Section 6-3.B)

66. Define “Project Specific Rents” and provides a mechanism for adjusting those rents. (Section 7-8.B)

67. Clarify that the instructions for a budget-based rent adjustment request include Emergency Low-Income Housing Preservation Act (ELIPHA) projects. (Section 7-9.B)

68. Clarify that even though the ELIHPA Use Agreement ends on the first day of the month and the Section 8 contract ends on the last day of the previous month that HUD considers them as ending coterminous and therefore the owner may select any renewal option for which the property is eligible, except Option Five.

(Section 7-9.C)

69. Clarify that if an owner does not provide timely notice that the tenant’s portion of the rent can only be increased due to an annual recertification or a change in household income. (Section 8-3.A.3.b.1)

70. Revise text to require appraisers to use the standard checklist when reviewing an RCS. (Section 9-17.A)

71. Remove Section 9-18 “Special Procedures for Mark-Up-To-Market Projects.”

72. Add a requirement that HUD will hire a third-party appraiser to complete a HUD RCS should rents in the owner’s RCS exceed 140 percent of the Median Gross Rent By Zip Code Tabulation Area. The effective date of this change is 150 days from the date of this transmittal. (Section 9-23.C)

73. Remove much of the text in Chapter 10, Residual Receipts” and refer the reader to Housing Notice 2012-14 or subsequent guidance.

74. Provide updated information on “Housing Conversion Actions.” (Section 11-1.C)

75. Provide reference information for those anticipating relocation activities.

(Section 11-2.A.3)

76. Provide additional guidance in case an owner does not provide acceptable tenant notification. (Section 11-4.E)

77. Add policy regarding LEP considerations during tenant notifications and other renewal communications. (Section 11-5)

78. Add policy regarding effective communications with persons with disabilities.

(Section 11-6)

79. Add language to the sample “One-Year Notification Letter Owner Intends to Renew” informing tenants that they will receive a one-year notification should the owner decide not to renew the Section 8 contract. (Section 11 Appendix 2)

80. Add a MTM second notice of Opt-Out 120 day notice to tenants should an owner decide to opt out during the processing of the MTM restructuring.

(Section 11 Appendix 3)

81. Clarify that the Project Manager has flexibility to renew a contract based on the REAC score. (Section 12-1)

82. Remind owners that certain barriers to accessibility may constitute an Exigent Health and Safety (EH&S) deficiency. (Section 12-2)

83. Add instructions to reviewers when a project receives a EH&S notice.

(Section 12-2.A)

84. Add language that if a property has a REAC score below 60, then the AE/CA will follow the instructions in Notice H 2015-02, or current instructions.

(Section 12-2 B.4)

85. Clarify the process when HUD decides not to renew a contact. (Section 13-2)

86. Add language that HUD may refuse to renew a contract if the poor condition of the project cannot be remedied in a cost effective manner. (Section 13-1.A.3)

87. Add language that a material adverse action includes failure to comply with nondiscrimination or economic opportunity orders. (Section 13-1.B.1)

88. Add instructions on appeals and short-term renewals. (Section 13-3.A)

89. Detail steps for a termination appeal process (Section 13-3.I)

90. Add language that requires the Regional Center/Satellite Office or the Property Disposition Center to provide notice to tenants receiving Section 8 assistance if HUD refuses to renew a contract. (Section 13-4)

91. Clarify that 515/8 projects are can renew under any option for which they qualify in addition to Option Four. (Section 14 Overview)

92. Add language that HUD will not accept a Rural Development (RD) utility analysis (UA) and an owner must submit a UA based on HUD’s standards. (Note after 14-2.A)

93. Clarify that a 515/8 must submit a RCS only if requesting a budget-based rent increase at the time of the annual “amend rents” and only if the budget request would result in rents that exceed what the OCAF would have provided.

(Section 14-2.B)

94. Add language that says that HUD will notify RHS and the owner of the new rents and the new annual adjustment period. (Section 14-2.D)

95. Clarify that when a RD loan has been paid in full that the owner will submit the annual budget request directly to HUD. (Section 14-2.G)

96. Clarify that for-profit owners can use Chapter 15 and renew under Option Two for purposes of Capital Repairs but must use Option One and Chapter 15 if seeking a Transfer or a Transfer with Capital Repairs. (Section 15-1)

97. Clarify that a nonprofit owner can include one or more nonprofit general partners or a sole general partner that is wholly owned and controlled by one or more nonprofits. (Section 15-3.A.1)

98. Add “Full” MTM projects to the list of these ineligible for participation in Chapter 15. (Section 15-4.C.3)

99. Clarify that owners with original term (pre-MAHRA) contracts can terminate the contract early to participate in Chapter 15 if they agree to certain conditions.

(Section 15-5.C.1)

100. Revise language to allow non-MAHRA and Option Four MAHRA contracts, with rents at or below comparable market rents, to terminate early in order to participate in Chapter 15 transactions. (Section 15-5.C.3)

101. Add language that 515 MAHRA contracts cannot be terminated early to participate in Chapter 15. (Section 15-5.C.2.a)

102. Clarify that a for-profit entity purchasing a property must renew the Section 8 HAP contract under Mark-Up-To-Market. (Section 15-5 E.2)

103. Revise language on combining contracts. (Section 15-5.D)

104. Add language to require RCSs submitted as part of a Chapter 15 transaction to determine both the “as is” comparable market rent and the “after rehab” comparable market rent. (Section 15-6.A.1)

105. Revise language that establishes the effective date for “after rehab” rents based on the type of loan used to finance. (Section15-6.A.2.b.2)

106. Add language that instructs the AE/CA to notify the owner/purchaser of the new post rehabilitation rents after processing the renewal request. (Section 15-6.D)

107. Add language that that allows “after rehab” rents to be effective at closing under certain circumstances. (Section 15-6.E.1.b)

108. Clarify that for unassisted units in a Chapter 15 transaction, it is the tenant’s portion of the rent that cannot be increased by more than 10 percent.

(Section 15-7.A)

109. Add language that an AE/CA will not lower comparable market rents in the RCS to reflect any use restrictions. (Section 15-8)

110. Remove language in the Guide concerning the structure of a PCNA and refer the lender/owner to HUD Notice 2012-27, “ Revised Requirements for Project Capital Needs Assessments, Estimated Reserves for Replacements and Remedies for Accessibility Deficiencies.”

111. Add language that certain types of non-insured projects are not required to have a Reserve for Replacement account unless required by the existing or proposed financing. (Note after Section 15-9.A)

112. Add that an owner cannot have FHEO charges or letter of finding under fair housing and failed to correct the violation as an eligibility requirement.

(Section 15-12.A.1)

113. Clarify the Owner submission requirements for environmental review under the Capital Repairs Program. (Section 15-12.B)

114. Eliminate the requirement formerly found in Section 15-13.A that property have at least a 30 REAC score to participate in Capital Repairs under Chapter 15.

115. Add language to clarify the meaning of “Compliant with HUD’s environmental regulations at 24 CFR Part 50”. (Section 15-13.A)

116. Clarify that rehabilitation undertaken under Chapter 15 does not trigger Davis- Bacon wage rates unless FHA financing is involved. (Section 15-13.A.11)

117. Remove the requirement that a nonprofit have ties to the community previously contained in Section 15-15.B)

118. Add language that purchasers must be in compliance with applicable nondiscrimination and equal opportunity requirements (Section 15-15.B)

119. Add language that purchasers must be in good standing and not subject to administrative sanctions. (Section 15-15.C)

120. Add language that directs the reader to Handbook 4350.1 for instructions on the process for approving the transfer of Physical Assets for HUD Insured properties.

(Section 15-17)

121. Remove old Chapter 16 “Other Issues” and transfers appropriate information to other chapters.

122. Add new Chapter 16 "Old Regulation" State Housing Finance Agency Projects – Owner Options upon Full Prepayment of Original, Permanent Financing” that describes the options owners have when they prepay a state agency financed loan on a project with an “old reg” Section 8 contract. (Section 16)

123. Revise “Attachment 1 Glossary” to include several new terms.

124. Revise “Attachment 2 List of Acronyms.”

125. Remove “Attachment 3-10”

Filing Instructions:

Remove: Insert:

The Guide dated 01/15/08 (and subsequent page changes)

The Guide effective 11/1/15

Edward L. Golding, Principal Deputy

Assistant Secretary for Housing

Office of Multifamily Housing The information collection requirements contained in this document are pending approval by the Office of Management and Budget

(OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control number 2502-0507 and

2502-0587.. In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.

Edward L. Golding, Principal Deputy Assistant Date Secretary for Housing

Chapter One Section 8 Renewal Guide

Chapter Two Section 8 Renewals

Chapter Three Option One – Mark-Up-To-Market

Chapter Four Option Two – Contract Renewals for Other Projects with Current Rents At or Below Comparable Market Rents

Chapter Five Option Three – Referral to Recap

Chapter Six Option Four – Renewal of Projects Exempt from or not Eligible for Debt-Restructuring

Chapter Seven Option Five – Renewal of Portfolio Reengineering Demonstration or Preservation Projects

Chapter Eight Option Six – Opt Outs

Chapter Nine Rent Comparability Studies

Chapter Ten Residual Receipts

Chapter Eleven Tenant Issues

Chapter Twelve Physical Condition of the Project

Chapter Thirteen HUD’s Refusal to Renew Section 8 HAP Contracts

Chapter Fourteen RHS Section 515/8

Chapter Fifteen Section 8 Preservation Efforts

Chapter Sixteen Old Regulation State Housing Finance Agency Projects – Owner Options upon Full Prepayment of Original, Permanent Financing

Chapter One - Published August 2015 1

Since the mid-1990’s, when long-term project-based Section 8 HAP contracts began expiring, Section 8 policy has evolved dramatically. For several years, HUD issued notices and other guidance in a piecemeal fashion to implement new policy related to renewing expiring Section 8 HAP contracts and preserving affordable housing.

To make Section 8 policy more effective and accessible for HUD’s partners, this Guide provides comprehensive guidance for renewing expiring Section 8 HAP contracts. It incorporates the procedures contained in previous Section 8 expiring contract Housing Notices, along with a number of changes. As a living document, over time this Guide is expected to contain nearly all of the information related to the renewal of expiring Section 8 HAP contracts.

To respond to the evolving nature of Section 8 renewal legislation and policy, the format of this Guide provides the opportunity to accommodate changes through revisions of one or more sections without a complete revision of the entire document. As is the case with HUD Handbooks, when legislation or policy decisions warrant modifications to this Guide, HUD will issue the revisions and make them available to all users. Only those portions of the Guide that are affected by the change will be modified. This Guide is on the web at:

http://www.hud.gov/offices/adm/hudclips/index.cfm and http://www.hud.gov/offices/hsg/mfh/mfhsec8.cfm

The instructions in this Guide apply to all Contract Administrators who are responsible for overseeing Section 8 HAP contracts. This includes Contract Administrators who have performance based contracts with HUD. Contract Administrators with performance based contracts are also required to follow the Guidebook for the Section 8 Contract Administration Initiative. The Section 8 Renewal Policy Guide Book is being published on July 31, 2015. This guidance will apply to renewal and amend rent packages received by the Department (or post-marked) 90 days after the publish date.

To assist users, a Glossary of the terms used throughout this Guide can be found at Attachment

2. The asterisks (*) throughout the Guide indicate revisions to the text except for Chapter Two and Sixteen which have been completely revised.

1-1. CONTENTS OF THIS GUIDE.

Chapter 1: Introduction http://www.hud.gov/offices/adm/hudclips/index.cfm http://www.hud.gov/offices/hsg/mfh/mfhsec8.cfm

Chapter One - Published August 2015 2

This Chapter provides the legislative history of the Multifamily Assisted Housing Reform and Affordability Act (MAHRA). It also provides a chronological list of HUD’s rule-making and administrative policies for implementing statutory and regulatory requirements associated with Section 8 expiring contract renewals.

Chapter 2: Section 8 Renewals

This Chapter outlines the various ways a contract can be renewed and provides six options available to owners with expiring Section 8 HAP contracts. It discusses early contract termination, rent comparability studies and which contracts to use by chosen option. This Chapter also provides instructions for processing either OCAF or budget based rent adjustment requests. In addition, HUD has included information on how to calculate waivers to various provisions in the Guide.

Chapter 3: Option One, Mark-Up-To-Market

This Chapter provides instructions for renewing a contract under the Mark-Up-To-Market (MUTM) option. It identifies who is eligible for renewal under this option and how to process the renewal request. Owners must meet certain eligibility criteria which are outlined in the chapter.

Chapter 4: Option Two, Contract Renewals For Other Projects with Current Rents At or Below Comparable Market Rents

This Chapter provides instructions for renewing a contract in cases where a contract’s current rents are at or below comparable market rents but the contract is not being renewed using the MUTM option. It outlines projects eligible to renew under this option and documentation to be submitted by the owner to HUD/Contract Administrators for review.

Chapter 5, Option Three, Referral to *Recap*

This Chapter discusses the procedures by which a project with rents above comparable market rents is referred to the Office of *Recapitalization (Recap) (formerly known as the* Affordable Housing Preservation (OAHP)) for processing and renewal. The Chapter identifies items an owner must submit with its renewal request and it outlines what steps Recap will take if a restructuring agreement is not reached between the owner and Recap.

Chapter 6, Option Four, Renewal of Projects Exempt from or not Eligible for Debt- Restructuring

This Chapter identifies “exception” projects. Exception projects are exempted from or ineligible for Recap and as such, generally they are exempt from having to conduct rent comparability studies (RCS) and lower rents to comparable market rents. *However, owners of projects subject to certain HUD-held and FHA insured mortgages must obtain a RCS when renewing under this Option. In addition, annual budget-based rent adjustments will require a RCS.* This Chapter outlines the owner’s renewal submission requirements and provides instructions for initial and subsequent renewals.

Chapter One - Published August 2015 3

Chapter 7, Option Five, Renewal of Portfolio Reengineering Demonstration or Preservation Projects

This Chapter details how to renew a contract that has been through the Demonstration program. It provides instructions for renewal in cases where the project had its rents reduced and/or had its mortgage restructured. It also provides guidance for renewing Preservation contracts according to the approved Plan of Action (POA).

Chapter 8, Option Six, Opt-Outs

This Chapter provides instructions for processing owner opt-outs. Opt-outs are expiring Section 8 project-based contracts whose owners elect not to renew the contract. This Chapter identifies the owner’s responsibilities to the tenants and provides processing instructions.

Chapter 9, Rent Comparability Studies

This Chapter provides instructions for conducting and reviewing a rent comparability study (RCS).

Chapter 10, Residual Receipts

*This Chapter presents an introduction to the treatment of Residual Receipts and refers users to the most current Notice regarding the subject.*

Chapter 11, Tenant Issues

This Chapter outlines all of the steps that must be followed to assure that tenants are protected during the renewal process. This Chapter defines housing conversion actions and identifies tenant notification requirements an owner must meet in a housing conversion action. It also describes the difference between a regular voucher and an enhanced voucher.

Chapter 12, Physical Condition of the Project

This Chapter discusses how a project’s physical condition impacts the contract renewal process.

Chapter 13, HUD’s Refusal to Renew Section 8 Contracts

This Chapter outlines the circumstances under which HUD may refuse to renew an expiring Section 8 contract, and it provides owners with an appeal process to follow in cases where their request to renew is rejected.

Chapter 14, Rural Housing Service (RHS) Section 515/8

This Chapter outlines how to renew a Section 8 contract for a Rural Housing Service (formally Farmers Home) Section 515 project.

Chapter 15, *Section 8 Preservation Efforts*

Chapter One - Published August 2015 4

This Chapter outlines the procedure for providing budget-based rent increases to owners who renew under the Capital Repairs Program or the Transfer Program. The Chapter identifies eligibility requirements for “marking up to budget” and provides instructions for future rent adjustments.

*Chapter 16, "Old Regulation" State Housing Finance Agency Projects – Owner Options upon Full Prepayment of Original, Permanent Financing

*This Chapter provides guidance for owners of Section 8 projects that are subject to the “old regulation” State Housing Finance Agency (“HFA”) form of HAP contract for New Construction or Substantial Rehabilitation projects, i.e., the November 1975 version of HUD-52645A (“1975 HAP Form”), for which the original, permanent financing provided by an HFA (“Financing”) was *or will be* prepaid in full.*

1-2. LEGISLATIVE HISTORY.

A. The Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA), Title V of the HUD Fiscal Year 1998 Appropriations Act, Pub. L.

105-65, was enacted on October 27, 1997. MAHRA established new policies for the renewal of Section 8 project-based contracts based on market rents instead of the Fair Market Rent (FMR) standard. For most insured projects with rents above market, the Act transferred Section 8 processing functions from the Multifamily Regional Centers and Satellite Offices Centers to Recap. For further information on renewals by Recap, see Chapter Five.

In general, MAHRA originally required that expiring Section 8 project-based contracts be renewed under Section 524(a)(1) or 524(a)(2).

1. Section 524(a)(1) renewals required a RCS. If the RCS indicated rents were at or below comparable market rents, the contract was renewed at current rents adjusted by OCAF, unless the owner submitted documentation justifying a budget-based rent increase or participation in MUTM. In no case could renewal rents exceed comparable market rents.

If the RCS indicated rents above comparable market rents, the contract was referred to Recap for debt restructuring and/or rent reduction.

2. Section 524(a)(2) renewals were for projects identified as “exception” projects that were not eligible for Recap. In some cases these projects had rents greater than market. Examples of projects that do not qualify as eligible multifamily housing projects pursuant to Section 512(2) of MAHRA include a project that is not subject to a HUD-held or insured mortgage; or, a project that has FHA mortgage insurance or is HUD-held with rents at or below comparable market rents.

B. The Preserving Affordable Housing for Senior Citizens and Families Into the 21st

Century Act of 1999, Titles II and V of the HUD Fiscal Year 2000 Appropriations Act, Pub. L. 106-74, was enacted on October 20, 1999. This legislation made modifications to the previous Section 8 renewal policies and established specific

Chapter One - Published August 2015 5 provisions for rent adjustments in subsequent years after an initial renewal under MAHRA. On December 29, 1999, Notice H99-36 was issued to implement these changes. Specifically, the Act

1. Modified Sections 524(a)(1) and 524(a)(2) of the original MAHRA.

Projects that previously fell under section 524(a)(1), are now covered under section 524(a), and projects that previously fell under section 524(a)(2), are now covered by section 524(b).

2. Specifically addressed Preservation projects and Portfolio Reengineering Demonstration projects in sections 524(e)(1) and 524(e)(2) of MAHRA.

3 Was the impetus for Notice H 1999-36 which created six options for owners to choose from when their Section 8 contracts expire. These options are detailed throughout this Guide.

C. The Quality Housing and Work Responsibility Act (QHWRA) of 1998, Title V of HUD’s Fiscal Year 1999 Appropriations Act, enacted on October 21, 1998, made only minor modifications to the tenant notification requirements stated in MAHRA. On May 27, 1999, HUD issued Notice H 99-08 implementing these changes. Specifically, QHWRA:

1. Required owners who intended to renew their expiring Section 8 contract to notify their tenants of their intent to do so. This requirement was amended by subsequent legislation (see Chapter Eleven for tenant notification requirements).

2. QHWRA changed the tenant notification requirement from one year to six months for contracts that were renewed for five year terms. The six month notification was to be provided to the tenants by the owners six months before expiration of the five year contract. This requirement was changed back to a one-year notification by subsequent legislation.

D. The FY 2001 Military Construction and FY 2000 Emergency Supplemental Appropriations Act amended the enhanced voucher statute at Section 8(t) of the United States Housing Act to grant enhanced voucher families the right to remain.

1-3. RULE MAKING.

A. Interim Rule. An Interim Rule implementing the Multifamily Housing Mortgage and Housing Assistance Restructuring Program (Mark-to-Market), was published in the Federal Register on September 11, 1998, at 63 FR 48925. This Rule discussed the 524 requirements and governed the renewal or restructuring of expiring Section 8 project-based contracts. At the Final Rule stage, the sections of the Interim Rule that governed the renewal of Section 8 that were not participating in the (m2m) program and the sections addressing the m2m program are separated into two Final Rules, Part 401 and Part 402.

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1. 24 CFR Part 401. The Final Rule implementing the (m2m) program was published on March 22, 2000. This Rule details how the Section 8 rents for eligible multifamily projects with HUD-insured or HUD-held mortgages will be reduced. The Mark-to-Market Program Operating Procedures Guide is available on the Recap Webpage at http://www.hud.gov/offices/hsg/omhar. The Guide may also be obtained by contacting the Multifamily Housing Clearinghouse at 1-800-685-8470.

2. 24 CFR Part 402. The Final Rule for Part 402 authorizes the renewal of expiring Section 8 project-based assistance contracts for projects without Restructuring Plans under the m2m program, including projects that are not eligible for Restructuring Plans and eligible projects for which the owners require contract renewals without Restructuring Plans.

1-4. ADMINISTRATIVE POLICY.

Since the enactment of MAHRA HUD has issued a number of Housing Notices which established Section 8 renewal policies. With the publication of this Guide, these Notices are no longer in effect.

H98-34. On October 16, 1998, HUD published Housing Notice H 98-34 which provided instructions for renewing Section 8 contracts expiring in FY 1999.

H99-08. On May 27, 1999, HUD published Housing Notice H 99-08 which made several modifications to H 98-34.

H99-15. On June 16, 1999, HUD published Housing Notice H 99-15 which implemented the Mark-Up-To-Market MUTM Option for Owners of projects with expiring Section 8 contracts.

H99-25. This Notice, published on September 22, 1999, extended Notices H98-34 and H99-08.

H99-32. This Notice, published December 1, 1999, clarified existing renewal policies.

H99-36. On December 29, 1999, Notice H99-36 was issued to implement changes to Section 8 renewal policies pursuant to the HUD Fiscal year 2000 Appropriations Act.

H00-12. On June 29, 2000, HUD published Housing Notice H 00-12 which provided policies and procedures for preparing, submitting and reviewing RCS associated with renewals of expiring Section 8 contracts.

H00-21. On October 13, 2000, HUD published Housing Notice H 00-21 which provided Guidelines for MUTM Nonprofit Transfers and Budget-Based Rent Increase for Capital Repairs by Nonprofit Owners.

1-5. APPLICABILITY.

This document applies to all Multifamily Housing Projects with expiring non-MAHRA and MAHRA project-based Section 8 assistance contracts, unless otherwise noted. It

Chapter One - Published August 2015 7 does not apply to Moderate Rehabilitation projects *(except to the extent that the project is eligible for Option Three)*, Section 8 project-based certificate contracts, Section 8 project based voucher contracts or former Section 23 projects administered by the Office of Public and Indian Housing (PIH) or to any projects administered by the Office of Community Planning and Development (CPD). *Regional Centers/Satellite Offices cannot waive sections of the Guide unless approved in advance by Headquarters. .*

1-6. PAPERWORK REDUCTION ACT.

The information collection requirements contained in this Guide book have been submitted to the Office of Management and Budget (OMB) for review and approval under the Paperwork Reduction Act of 1995 (44 U.S.C. 3520). An OMB approval number has been assigned. The OMB Control Number is 2502-0587.

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2-1. INTRODUCTION.

The *enactment* of the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) by Congress signaled an important shift in the Section 8 program: In general, Section 8 rents must be comparable to unsubsidized rents in the area where the project is located. In some cases, this requirement meant the rents could be adjusted upward. Congress also recognized that the rents at some Section 8 projects needed to be reduced. For many projects, MAHRA requires the preparation of a rent comparability study (RCS), to find out if a project’s Section 8 rents are comparable to market rent levels.

When an owner elects not to renew but instead chooses to opt-out of a project-based Section 8 contract, eligible tenants living in the Section 8 project based assisted units at the project are provided with enhanced vouchers (see Chapter Eleven).

2-2. OWNER OPTIONS.

At the time of renewal, an owner must choose among any of six renewal options for which the project is eligible.

A. Six Owner Options.

1. Option One is Mark-Up-To-Market(MUTM).

2. Option Two is the renewal of contracts with existing rents adjusted by an operating cost adjustment factor (OCAF) or on the basis of a budget:

a. When rents under the expiring contract are at or below market; or

b. Where the owner of a project * has a contract that contains language that allows a discretionary comparability adjustment within the 5-year term and the project is exempt from Recap restructuring* with above market rents requests to have the project’s rents reduced to market.

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3. Option Three is referral to Recap for processing because the contract rents are greater than market rents and the project has a HUD-insured or HUD-held mortgage.

Note: FHA-insured projects that have a Section 8 moderate rehabilitation contract other than a moderate rehabilitation contract under Section 441 of the Stewart B. McKinney Homeless Assistance Act are eligible for referral to Recap.

4. Option Four is renewal of contracts for “exception” projects under Section 524(b)(1) of MAHRA. These projects are exempt from debt-restructuring pursuant to Section 514(h) of MAHRA or are not an “eligible multifamily housing project,” as defined in Section 512(2) of MAHRA;

5. Option Five is the renewal of contracts for:

a. Portfolio Reengineering Demonstration projects with a:

Mortgage Restructuring Demo Program Use Agreement; or Budget-Based Without Mortgage Restructuring Demo Program

Use Agreement.

b. Preservation projects under either:

Title II, Emergency Low Income Housing Preservation Act of 1987 (ELIHPA); or

Title VI, Low-Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA).

6. Option Six is to opt-out of the Section 8 contract.

B. Determining Option.

When determining which option to select, owners should be aware that the contract renewal options are determined by the project’s eligibility at the expiration date of the existing Section 8 HAP contract. If the HAP contract is being terminated by mutual agreement of the parties, the project eligibility is determined at the time of termination of the HAP contract by mutual agreement.

2-3. TYPES OF RENEWALS.

When requesting a renewal, an owner must submit the Contract Renewal Request Form, Form HUD-9624, available on HUDCLIPS, and any required supporting documentation to the HUD Project Manager or the Contract Administrator/Performance Based Contract Administrator (AE/CA) for processing. (See Section 2-22 for detailed processing instructions.) The HUDCLIPS web address is:

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A. Initial Renewal.

Generally, the first renewal of a project’s Section 8 contract or contract stage processed under MAHRA’s rules is the initial renewal of the contract.

B. Subsequent Renewal.

The renewal of a MAHRA contract after the initial renewal is considered the subsequent renewal of the contract.

C. Renewal Options.

1. As a general rule, an owner may renew the contract under any option in which the project is eligible at the time of renewal (i.e., the expiration date of the existing contract or, if applicable, the date of termination by mutual agreement of the existing contract).

2. Exceptions to the general rule include:

a. Projects with Watch List Contracts can only be renewed under Option Three, Re-entry Into Recap, for three consecutive one-year renewals, using the Watch List Contract. At the end of the third one-year renewal, if the project has demonstrated physical, financial and managerial improvement to HUD’s satisfaction, the project can renew under any option in which the project is eligible at the time of renewal.

Note: Certain housing finance agency HAP contracts may terminate at the prepayment of the original financing (See Chapter 16 for more information. An owner who wishes to terminate early any HFA contract that does not terminate at the prepayment of the original financing must obtain HFA approval prior to the termination of the contract.

b. Projects with contracts that are renewed under Section 515 of MAHRA (Full Mark-to-Market Renewal Contract) must renew under Option Three during the life of the MTM Use Agreement.

*(See Section 5-5.C for more information)*

c. Owners of Preservation projects and Owners of Portfolio Reengineering Demonstration projects must renew under Option Five during the life of the LIHPHRA or ELIPHRA Use Agreements or of the Demo Use Agreement, except that the owner of a Preservation Project may request Mark-to-Market debt-restructuring any time prior to Sunset if the project is being transferred or sold. (See section 5-1.D)

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2-4. EARLY TERMINATION OF A CONTRACT.

A. Non-MAHRA Contracts.

HUD will permit the early termination of a non-MAHRA contract (i.e., a contract that has not yet been renewed under MAHRA) for an owner wanting to enter into a MAHRA contract only if the owner:

1. Renews the Section 8 contract for 20 years under Option One, Two, Three or Four; and

2. Agrees to:

a. The Preservation Exhibit, as contained in HUD Notice 2013-17 in which provides for the renewal of the HAP contract at the end of the 20 years for a term that is at least equal to the term of the original terminated contract.

b. Sign the HUD-93184 “Rider to Original Section 8 Housing Assistance Payments Contract.”

B. MAHRA Contracts.

Owners may request the early termination of an existing non-MUTM MAHRA contract only for the following reasons:

1. A for profit owner or a housing authority occupying the status of a “public body corporate and politic” under the state legislation under which it was created, wishes to renew the contract under Option One, MUTM.

2. Any owner wishes to renew the contract under Option Two and preserve long term affordability by signing a 20-year contract.

3. Under Option Three:

a. An owner has an Interim-Lite or Interim-Full M2M contract and Recap has completed processing before the expiration date of the interim contract.

b. An owner with a Watch List contract that meets one of the requirements listed in Section 5-6.B.4. of this Guide.

c. The contract was previously renewed as a Lite contract and the owner wishes to complete a full MTM debt restructuring.

d. An owner requests referral to Recap based on a RCS that demonstrates that current rents are above market.

e. An owner wishes to refinance the project and wishes to renew the contract for 20 years.

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4. *An owner with an Option Five contract who wishes to renew the contract under Option Five using a 20 year contract to preserve long term affordability.*

5. To combine multiple contracts or stages. (See Section 2-10.C.2 below.)

Note: An owner with a MUTM contract that has fulfilled the minimum five year term, is allowed to terminate the contract early and renew the contract under any option for which the project is eligible for 20 years. An owner with a MUTM contract that has not fulfilled the minimum five year term may terminate the contract early but only if the owner agrees to renew the contract under MUTM for 20 years, assuming the project is eligible for MUTM when the first contract is terminated.

C. The owner’s request for early termination under A or B above must be in writing and submitted to the AE/CA.

D. An owner is not allowed to terminate a contract early in order to Opt Out of the Section 8 program.

Note: The AE/CA should document the project file by including a note that reads: “By mutual agreement, the owner and the CA have determined to terminate the Renewal Contract that runs from _____ to _____ and, instead, to enter into a 20-year contract, which will run from _______ to ________. The owner has also agreed to the terms of the Preservation Exhibit.

2-5. RENT COMPARABILITY STUDY (RCS).

Certain renewal options under MAHRA require a RCS.

A. A RCS is prepared following the instructions found in Chapter Nine of this Guide.

In addition, Section 9-4 of this Guide provides acceptable alternatives to the RCS.

B. The RCS:

1. Is valid for 5 years from the date the owner’s Appraiser signs the HUD- 92273-S8, Rent Comparability Grid. HUD’s Integrated Real Estate Management System (iREMS) automatically generates an event notice to the AE/CA that the RCS is coming to the end of its five-year life cycle.

The AE/CA must remind affected owners in writing that a new RCS is required at the end of the fifth year to receive a rent adjustment or a renewal of the Section 8 Contract.

2. Must include all of the Section 8 unit types in the project.

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3. Establishes the market rent for renewal of expiring contracts or stages that were not combined and will expire during the five-year life cycle of the RCS. (See Section 2-10.C. below for a discussion of combining contracts.)

C. Reviewing the RCS.

Upon receipt of the RCS, the AE/CA, along with a qualified appraiser, will review the RCS based on the instructions found in Sections 9-17 through 9-20 of this Guide and determine whether the comparable market rent conclusions are reasonable. If the conclusions are deemed reasonable, the AE/CA records the RCS data in iREMS.

Note: The AE/CA shall not lower the comparable market rents in the RCS to reflect any use agreement restriction on the rents that can be charged;

(e.g. tax credit restricted rents).

D. Adjusting the RCS.

Contracts…