In December 2022, Congress passed the Consolidated Appropriations Act of 2023, which included language that brings some relief to the portfolio of Section 8 properties that went through a Mark-to-Market (M2M) restructuring. Properties in the M2M portfolio have restricted annual rent increases based on an operating cost adjustment factor since entering into M2M use agreements, many in the early 2000s. But, on Feb. 29, the Department of Housing and Urban Development (HUD) issued guidance on the budget-based rent adjustment (BBRA) opportunity for the M2M portfolio as authorized in the 2023 Appropriations Act. This is a significant development, meaning eligible properties can now apply to HUD for a BBRA as described in the new guidance. This rent adjustment would cover operating expenses or substantial rehabilitation at the property. Eligible properties are limited to one BBRA every 10 years and must submit initial and final applications to HUD’s Office of Recapitalization for approval.
Eligibility for BBRA
Approximately 2,000 Section 8 properties are encumbered by M2M-use agreements. Not all are initially eligible for the BBRA. HUD’s guidance sets forth multiple tiers of eligibility in an effort to direct funds available for these adjustments to properties with the most need first. Only the first tier of eligible projects, defined as “Group A,” may submit applications at this time.
Group A projects are those that meet one of the items in a list of criteria outlined by HUD in the notice, including:
· REAC Score—Most recent REAC (Real Estate Assessment Center) score is below 30, or the previous two consecutive scores are below 60;
· Operating Cost Coverage Ratio—The project’s operating cost coverage ratio is less than 1.0;
· Owner Contributions—Owner contributions were made in excess of $3,000/unit in the most recent fiscal year or in excess of $1,500/unit in each of the last three fiscal years;
· HUD Disposition Action—The project is within the HUD dispositions process, either because HUD has acquired the first mortgage debt, or the property, through an FHA insurance claim foreclosure or otherwise is subject to a disposition action as detailed in the Notice; and
· Vacancy—Average physical vacancy rate is 25% or higher for the most recent 24-month period.
HUD states that it will later consider applications from Groups B, C, and D and will alert owners when those applications will be considered by publishing a notice on HUD’s website. The eligibility criteria for Groups B, C, and D are outlined in the notice and reflect similar physical and financial criteria as those for Group A, as well as consideration of the fair market rents (FMR) as compared to the rents at the project.
BBRA Application Process
The BBRA application process consists of an initial submission and a final submission. Initial applications will be submitted through a portal on HUD’s website. An owner must be invited by HUD, based on the initial submission, to submit the final submission. HUD has reserved the more costly diligence items for the final submission to allow owners to confirm eligibility prior to incurring costs on submission materials.
HUD will prioritize consideration of any initial applications submitted by March 28. After that date, HUD will accept Group A initial submissions on a rolling, first-come, first-served basis. Owners interested in this opportunity should ideally complete an initial submission by the March 28 deadline. The initial submission does not require third-party reports and consists of information that should be readily accessible to most owners.
Following receipt of the initial submissions, HUD will estimate the budgetary impact of the requests. Upon determining eligibility and that the agency is likely to have sufficient funds to accommodate the BBRA, HUD will invite the owner to deliver a final submission. Final submission requirements are more substantive and include an owner narrative as well as a capital needs assessment via the eTool, budget worksheet, and associated documentation (HUD Form 92547) and operating pro forma, rent comparability studies, and tenant notices, among other requirements.
HUD would then issue a conditional approval letter that contains requirements that must be met prior to the rent adjustment going into effect. Most notably, HUD will require owners to agree to an additional 20-year term of the affordability and use restrictions under the Multifamily Assisted Housing Reform and Affordability Act, which will require the owner to renew the Housing Assistance Payments contract during that term.
Next Steps for M2M Properties
With the initial Group A submission deadline quickly approaching on March 28, we expect to see a large volume of applications in the program’s first round. It is our hope that with additional increases to HUD’s renewal budget, the opportunity for HUD to open the application process up to additional groups will happen quickly. This new guidance opens the path for eligible M2M properties to receive much needed recapitalization and improvement, which will preserve these affordable housing assets and benefit their residents.
