The Department of Housing and Urban Development (HUD) submitted the Preservation, Enhancement, and Transformation of Rental Assistance Act of 2010 (PETRA) to Congress on May 11. PETRA proposes substantial modifications to the way in which HUD provides rental assistance in various HUD programs in an attempt to unify and simplify such programs.

The department provides rental assistance to more than 4.6 million households through approximately 13 different rental subsidy programs. PETRA authorizes HUD to initiate “a multi-year effort” to transform these properties into properties with “long-term property-based rental assistance contracts that include flexibility to address capital requirements, enhance resident choice, and streamline and simplify the administration of rental assistance.” The president’s fiscal 2011 budget requests $350 million for the first phase of the transforming rental assistance (TRA) initiative. The goal of PETRA is to consolidate and simplify the rental subsidy programs down to three Sec. 8 programs: Project-based contracts (PBCs); project-based vouchers (PBVs); and tenant-based vouchers (TBVs). HUD intends for the TRA initiative to allow the leveraging of additional resources to meet the capital and operating needs of the projects participating in the initiative.

PETRA authorizes the secretary to allocate funds to public housing authorities and other owners of “eligible properties” for conversion to properties assisted under a new Sec. 8(n) PBC program or the PBV program, as modified by PETRA. Eligible properties would include those currently assisted under the public housing program, the rent supplement program, the rental assistance program, various Sec. 8 programs, and other federal affordable housing programs identified by the secretary by notice. For projects in the TRA initiative that are only partially assisted or are “small” projects, the owners can request PBVs under the modified PBV program. 

The main features of the new Sec. 8(n) PBC program include:

  • The possibility of long-term (20-year) contract terms or renewals in order to provide more security to lenders or for other reasons;
  • Rents capped to comparable rents that do not exceed 110 percent of the fair market rent. The secretary may approve rents above the comparable market rent for “preservation-worthy” properties, up to the higher of 110 percent of the fair market rent or 120 percent of the comparable market rent. Below-market rents are permitted for properties that are physically and financially sustainable at such lower rents;
  • The annual adjustment of contract rents using an “index intended to reflect changes in the rents of multifamily properties” and a re-benchmarking of rents to market at least every five years. In the interim, an owner that undertakes significant improvements to a property would be permitted to request an increase above the index, and HUD could reset rents to market based on a comparability study. This part of the proposal would appear to eliminate operating cost adjustment factor method for adjusting rents that is used in a number of Sec. 8 programs and would introduce a new concept for adjusting rents based on a market index prepared by HUD; and
  • The ability to access cash flow may not differ based on the for-profit or nonprofit tax status of the owner.

Some of the changes to the current PBV program would include:

  • Up to 25 percent (as opposed to 20 percent) of units may be assisted in housing that serves homeless individuals and families, where supportive services are provided, or that is located in areas where vouchers are difficult to use. Agencies administering vouchers for projects can project-base up to 40 percent of the dwelling units assisted by the agency;
  • Allows for assistance at the greater of 25 dwelling units or 25 percent of the dwelling units in any project, except for properties servicing elderly families or households eligible for comprehensive social servicing converting to PBV. For areas in which vouchers are difficult to use and for census tracts with a poverty rate of 20 percent or less, up to 40 percent of the units in a property would be permitted to be assisted without additional conditions; and
  • Rents must be “reasonable” in light of comparable unassisted units in the local market; the secretary can approve rents above 110 percent of the fair market rent, but there is no authorization for above-market rents The secretary can require that rents be adjusted annually on the same index as multifamily properties.

In addition, PETRA proposes to allow the secretary to establish uniform rental assistance program policies and procedures, including resident choice and mobility that would allow tenants greater opportunities to move with tenant-based assistance from projects with PBCs; rights of tenants to organize; applicant and tenant procedural rights; and uniform physical condition standards. PETRA goes a good way in addressing some of the issues in current HUD rental subsidy programs, especially in the public housing program, the rent supplement program, and the rental assistance program. However, there is some industry concern about the effects the TRA proposal might have on those projects that are already assisted under the Sec. 8 project-based program administered by HUD’s Office of Housing.

Michael H. Reardon is an affordable housing partner in Nixon Peabody’s Washington, D.C., office. Tatiana Gutierrez Abendschein is an associate in the firm’s affordable housing practice and is also based in the firm’s Washington, D.C., office.