President Biden signed the Consolidated Appropriations Act of 2023, commonly known as the omnibus appropriations bill, Dec. 30, hours before a short-term funding measure was set to expire. Passage of the bill ended the funding drama in Congress that we are now accustomed to each year.
The section of the omnibus appropriations bill that funds the Department of Housing and Urban Development (HUD) had a provision that will bring relief to the Section 8 portfolio, which had rents marked down to market (MTM) over the past 20 years. Section 236 of the general provisions amends the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRAA) to provide for MTM properties to receive a budget-based rent increase (BBRI) that includes new debt service, debt-service coverage, and reserve deposits. Rent adjustments for MTM properties have been limited to HUD’s annual operating cost adjustment factor (OCAF), and today many properties have Section 8 rents well below market.
MAHRAA was enacted in 1997 to control Section 8 rents and preserve the projects. Section 8 rents were never tied to the market but rather were generally based on an initial budget to build, rehab, and operate a property. Future rents were adjusted by a cost factor annually. Due to the costs of development and historically high interest rates, many properties would not have been built if underwritten at market rents. By the mid-1990s, Congress wanted to reduce Section 8 rents and overall costs to the government without putting the properties in default of their Federal Housing Administration (FHA)-insured mortgage obligations and while ensuring the properties’ long-term preservation as affordable housing. Approximately 2,000 properties were restructured under MAHRAA.
To achieve these goals, Congress created a program whereby rents would be reduced to comparable market rents, the original mortgage would be restructured into a new FHA-insured loan supported by the lower rents, and second and sometimes third mortgages were created. Instead of maintaining the rents at market, MAHRAA provided that future rent increases would be based upon a statewide OCAF. Immediate repairs would be to address health and safety issues, and a reserve would be established to address future repair needs. And to label this a “preservation of affordable housing” program, an owner would enter into a 30-year use agreement to maintain the property as affordable.
From the very beginning, owners questioned whether MTM properties could receive only an OCAF rent adjustment even if the project needs could not be met at the resulting rents. HUD assured owners that was not the case and stated in the preamble to the final rule implementing MAHRAA:
HUD retains the discretion to use a budget-based rent adjustment instead (of OCAF) at the request of the owner. … An owner may request a budget-based rent adjustment if the owner can demonstrate that available operating expenses are insufficient to maintain a project. (65 Fed Reg 15453; March 22, 2000)
HUD recognized that the underwriting for restructuring plans would not always be an accurate estimate of future operations and needs. However, HUD never approved an owner’s request for a BBRI notwithstanding a demonstrated need for one. The inability of owners to receive such necessary rent increases created the scenario we have today: hundreds of underperforming Section 8 properties with inadequate rents to maintain the physical and financial viability of the MTM portfolio or to support rehabilitation. Buildings are literally falling apart.
As properties began to decline and the need for a BBRI became clear, two affordable housing trade associations, the Institute for Responsible Housing Preservation and the National Leased Housing Association began to advocate for the legislative changes. HUD also recognized the need for a rent alternative to OCAF adjustments.
A New Beginning
The new legislation, which amends Section 514 of MAHRAA, will change all of this. An owner now has the opportunity to receive a budget-based rent increase to cover operating costs or to substantially rehabilitate and recapitalize the property for the next 20 years. Most owners likely will do a major rehab as these properties are more than 40 years old, and they typically had minimal work completed as part of the MTM restructuring.
An owner can request a BBRI under this authority once every 10 years. The statute requires the owner to extend the MTM use agreement for 20 years and to renew the Housing Assistance Payment contract during the extended term. The once-every-10-years’ limitation on budget-based rent increases and the extensions should not be an issue. The amendment clarifies that an owner can renew the Section 8 contract under any renewal option under Section 524 of MAHRAA once the original 30 years of the MTM use agreement have passed. Most properties are within 10 years of this original expiration date.
Over the next few months, HUD will provide guidance on how this new renewal option is implemented. There should not be any order of priority. An owner who is ready to request a BBRI and submits the supporting documents should be processed in the normal course. As we expect many rent requests will include a major rehabilitation and recapitalization, it will take time for owners to assemble these financing transactions. This is an opportunity for all of us in the affordable housing community to invest and preserve the MTM portfolio as affordable housing preservation was meant to be.