• HUD Announces Final Regulations for Project Based Vouchers
  • January 4, 2006 | Author: Stuart D. Poppel
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • The United States Department of Housing and Urban Development ("HUD") recently released its final Section 8 Project-Based Voucher ("PBV") regulations for the project based voucher component of HUD's Housing Choice Voucher (formerly Section 8) program. The new regulations became effective on November 14, 2005 and constitute a comprehensive revision of the project-based voucher program and replaces HUD's prior project-based certificate ("PBC") regulations.

    The project-based voucher component of HUD's Housing Choice Voucher program was enacted by Congress in 1998 pursuant to the Quality Housing and Work Responsibility Act of 1998 ("QHWRA"). QHWRA amended HUD's prior regulations which allowed project-based rental assistance under HUD's former Section 8 rental assistance program. The provisions of QHWRA concerning project-based vouchers were then significantly revised by Congress in 2000 in the fiscal year 2001 HUD appropriations bill. The resulting statutory authority for HUD's Project-Based Voucher program is now found at Section 8(o)(13) of the United States Housing Act of 1937 (which is codified at 42 U.S.C. ยง 1437(f)(o)(13)). Under the 1998 and 2000 statutory changes, and as further expanded by the recently released final PBV regulations, a Public Housing Authority ("PHA") may utilize up to 20% of its Housing Choice Voucher program funding each year for project-based rental assistance. This project-based assistance may be provided both to existing housing that does not need rehabilitation, as well as to newly constructed or newly rehabilitated housing. HUD's project-based rental assistance is governed by many of the same rules that govern the more well-known tenant based voucher program (which was formerly known as the Section 8 program) which are set forth at 24 CFR Part 982. The new PBV regulations are found at 24 CFR Part 983 and not only supersede a January 16, 2001 notice that HUD published in the Federal Register outlining the changes made by the 1998 and 2000 Acts to the project-based voucher program, but also made numerous changes, as outlined below, from HUD's proposed rule for the Project-Based Voucher program that was issued on March 18, 2004 after HUD's receipt of numerous public comments.

    Under the final PBV regulations, a public housing authority may designate up to 20% of its yearly housing choice voucher assistance for project-based funding. Project-based voucher assistance is different from tenant based assistance in that, under the tenant based assistance program, the vouchers are issued by the PHA directly to individual tenants, who may then utilize those vouchers at various apartments and/or homes throughout the PHA's geographic area. Under the project-based voucher program, the vouchers are not issued to the tenants, but rather to the owner of apartments who has entered into a Housing Assistance Payment ("HAP") contract with the PHA; as a result, project-based rental assistance is not portable by the tenant if the tenant moves out of the apartment subject to the HAP contract. Under the final PBV regulations, a PHA may enter into a HAP contract with a project owner for a minimum term of one year, and a maximum term of up to ten years, but the PHA's contractual commitment to provide funds under the HAP contract is subject to the availability of funds from HUD. At the end of the ten year HAP term, the PHA may extend the HAP contract, again subject to the availability of appropriated funds, for an additional five year period (this had been limited to 1 year extensions under the March 2004 proposed rule), so that under the final PBV regulations the maximum term for a HAP contract, with extensions, will be fifteen years. Such extensions of the HAP contract under the final PBV regulations are to occur one year before the expiration of the then current term of the HAP contract. Note that this prohibition on extending a HAP contract no more than one year prior to its expiration could cause problems in projects utilizing Low Income Housing Tax Credits ("LIHTC") since tax credit investors generally want to have the HAP contract extended at its initial execution for as long a period of time as HUD allows (which is now a maximum of 15 years under the final PBV regulations).

    The first PBV regulations also provide that a PHA may not enter into a HAP Contract, or the Agreement to enter into a HAP contract described in the next paragraph, (i) prior to the PHA receiving environmental clearance from HUD under 24 CFR Parts 50 and 58, and (ii) until HUD has determined that the amount of project-based voucher assistance that is intended to be provided by the PHA to a particular apartment building or project is not more than is necessary, and has been reviewed and approved by HUD under HUD's subsidy-layering regulations as provided under 24 CFR Part 983.55. HUD indicated in the final PBV regulation that its Office of Public and Indian Housing will be issuing separate regulations to address the delegation by HUD of subsidy layering reviews in connection with PBV assistance. Note also that 24 CFR Part 983.154 of the final PBV regulations provides that the owner must pay federal Davis-Bacon prevailing wages for newly constructed or substantially rehabilitated projects that will contain nine or more PBV assisted contract units and also comply with HUD's Section 3 requirements regarding training, employment and contracting opportunities for all newly constructed or substantially rehabilitated projects that will have a HAP contract.

    If a PHA desires to administer a project-based voucher component of its housing choice voucher program, a PHA may enter into a HAP contract with an owner of existing apartments or may enter into an Agreement to provide housing assistance payments with an owner if the rental units are not currently in existence and instead are to be newly constructed or substantially rehabilitated by that owner. The Agreement to enter into the HAP contract obligates the PHA to enter into the HAP contract with the owner once those units have been created and have been inspected by the PHA to ensure they meet HUD's Housing Quality Standards (which are set forth at 24 CFR Part 982.401). A PHA has discretion whether to institute a project-based voucher program and does not need to obtain HUD approval if it desires to do so, provided that, as explained in the final PBV regulations, the project-based voucher program is authorized in the PHA's administrative plan which is submitted to HUD each year.

    In determining which projects or buildings to fund with its project-based voucher assistance, the PHA's administrative plan must set forth the procedures established by the PHA to receive proposals from owners for project-based voucher assistance and for the PHA's selection and award of project-based assistance to those proposals that it desires to fund. Under the final PBV regulations at 24 CFR Part 983, the PHA must select project-based voucher proposals in accordance with either (i) a request for proposals issued by the PHA, or (ii) a proposal for project-based assistance that was submitted by an owner for housing that is assisted by a federal, state or local government housing assistance program or supportive services program, which housing assistance program requires competitive selection of proposals (such as a project that has been awarded 9% LIHTC), provided that the owner's proposal had been selected under that particular funding program's competitive selection requirements within three years of the project-based voucher proposal selection date by the PHA and the prior competitive selection proposal did not involve any consideration that the project would in fact receive project-based voucher assistance. The final PBV regulations provide that the Agreement to enter into the HAP contract must be executed promptly after the PHA notifies the owner of the PHA's selection of the owner for project-based voucher assistance. At the discretion of the PHA, and provided that the total number of units in a building that will receive PBV assistance do not exceed 25% of the number of dwelling units in the building (as discussed below), a HAP contract may be amended during the three year period immediately following the execution date of the HAP contract to add additional project-based voucher units in the same building; note that as described below the HAP contract may be amended during its term, even after that initial three year period, to substitute units covered by the HAP contract.

    Under Section 16 of the United States Housing Act of 1937, at least 75% of the families admitted to a PHA's tenant based and project-based voucher programs each year must be families whose annual income is below 30% of the area median income for that area (these are defined by HUD as "extremely low income families"); this income targeting requirement is program-wide for the PHA and is not required to be applied to a particular PBV building or project. Project-based voucher assistance is limited to rental housing and may not be provided to nursing homes, transitional housing, cooperative housing, student housing, owner-occupied housing, a high-rise elevator project that may be occupied by families with children unless the PHA determines that there is no practical alternative and HUD approves that determination, or for any unit currently existing that has a family who is not eligible for assistance under the project-based voucher program. In addition, under 24 CFR Part 983.54, a PHA may not pay project-based voucher assistance to any unit that is a public housing unit, a unit that is subsidized with another form of housing choice voucher assistance such as HUD's tenant based voucher assistance, a unit subsidized with another government rental subsidy, such as HUD's Section 236 rental assistance payments or rental assistance under the federal HOME Investment Partnerships Program, or units subsidized by HUD under its Section 202 (housing for seniors) or Section 811 (housing for persons with disabilities) programs. Under the final PBV regulation, project-based voucher assistance is permitted for a unit that has been subsidized with HUD Section 236 interest reduction payments and so PBV assistance may be, and often is, utilized in projects undergoing a Section 236(e)(2) IRP decoupling. In addition, under the final PBV regulations, rental units located in a project that is being developed with Hope VI funds (awarded in fiscal year 2001 or later) or HUD Capital funds which are themselves not public housing units may receive PBV assistance so long as the ratio of those rental units to the public housing units in the development is not less than the ratio of non-Hope VI or Capital funds (or other public housing funds) to the Hope VI and Capital funds and other public housing funds used in the development (i.e. a 30 unit project may have 20 PBV units and 10 public housing units so long as the amount of public housing funds, including Hope VI and Capital funds, is less than 33.33% of the total amount of funds used in the development of the 30 rental units). As a result, it is permissible, subject to the limitations just described, to use PBV assistance in Hope VI/Mixed Finance transactions that are "mixed-income" developments, i.e. that do not consist solely of all public housing units.

    A very important limitation established under the new PBV regulations is that project-based voucher assistance may not be paid for more than 25% of the dwelling units in any building. This 25% cap had been much more restrictive under the March 2004 proposed regulations, which would have imposed that 25% limitation to all rental units in a building that receive any type of federal project-based assistance, and not just PBV rental assistance, such as rental assistance under the HOME Investment Partnerships Program and HUD's Section 202 and 811 programs. There are two significant exceptions to this 25% cap that are set forth in the final PBV regulations. First, the 25% cap does not apply to units that are located in a single-family building, which under 24 CFR Part 983.3 means a building with no more than four dwelling units, and so would exclude from the 25% cap the quads, twins and townhouses that are very common in today's new affordable housing developments. Second, the 25% cap does not apply to units in a multi-family building (i.e. those buildings which have five or more dwelling units) that are excepted from the 25% cap because they are made available for "qualifying families", which are defined as elderly or disabled families, or families that are receiving supportive services that are outlined in the PHA's administrative plan. Under the final PBV regulations, this last exception is defined as at least one person in that family household is receiving at least one supportive service which qualifies under the PHA's administrative plan; this was a change from HUD's March 2004 proposed PBV rule which limited this exception to participation in the PHA's Family Self-Sufficiency Program. Under the final PBV regulations, a PHA may not require participation in any medical or disability related services as a condition of living in such an excepted PBV unit, other than drug and alcohol treatment may be required for current users. A project owner may decide to fix the specific units in a building that will receive project-based voucher assistance, or allow those units to float within its building so long as the 25% cap is not exceeded; however, under the final PBV regulations, allowing units to float within the building will raise issues for the owner with respect to adjustment of rents for that project-based unit, as described below.

    Under the final PBV regulations, a PHA may establish a separate waiting list for project-based units or may use the same waiting list for both tenant based and project-based units administered by the PHA. In addition, a PHA may create a separate waiting list for project-based units in a particular project or building or may use a single waiting list for the PHA's entire project-based voucher program. During the term of the HAP contract, the owner must lease project-based voucher units only to eligible families selected and referred to the owner by the PHA from the PHA's waiting list.

    Under 24 CFR Part 983.301, the amount of the initial rent that the owner may collect from its tenants is established at the beginning of the HAP contract term. During the term of the HAP contract, the rent to the owner is redetermined at (i) the owner's request for a rent increase and (ii) such time when there is a 5% or greater decrease in the published HUD Fair Market Rent for the area in which the project-based unit is located. Under the final PBV regulations, the general rule is that the rent an owner may charge for a unit receiving PBV assistance shall not exceed the lower of (i) 110% of the applicable Fair Market Rent for the unit, based on bedroom size, (ii) the reasonable rent as determined by the PHA, or (iii) the rent requested by the owner.

    A significant change imposed by the final PBV rule affects certain rental units located in Low Income Housing Tax Credit projects. Under 24 CFR Part 983.301, if the unit receiving PBV assistance is also a Low Income Housing Tax Credit unit, the project is not located in a Qualified Census Tract, the unit is located in a building that has LIHTC units of the same bedroom size as the PBV units but those comparable LIHTC units do not have any form of rental assistance other than tax credits, and if the tax credit rent exceeds the applicable HUD Fair Market Rent, then the rent to the owner is not to exceed the lower of (i) the tax credit rent minus any utility allowance as established under the rules of the Low Income Housing Tax Credit program, (ii) the reasonable rent as determined by the PHA, or (iii) the rent requested by the owner. This provision was not contained in HUD's March 2004 proposed PBV rule and contradicts HUD Notice PIH 2002-22, which had previously allowed the rent to the owner to be more than the tax credit rent if the tax credit rent was less than 110% of the HUD Fair Market Rent. It is not known why HUD felt it necessary, or desirable, to establish a separate rent test for PBV units that are also tax credits units which are located in areas that are not in a Qualified Census Tract, but this exception to the basic PBV rent rule established under 24 CFR Part 983.301 could result in a significant reduction in the rent an owner may receive with respect to that PBV/LIHTC unit - this is so because under the rules of the LIHTC program an owner may receive more than the maximum tax credit rent with respect to a particular LIHTC unit so long as that additional rent (above the maximum tax credit rent) is not paid by the tenant but instead is paid from a recognized tenant rental assistance program, such as HUD's housing choice voucher program. Consequently, under the final PBV regulations, the owner of such an LIHTC unit would be limited to receiving a total (i) rent from the tenant plus (ii) PBV assistance for that unit up to only the maximum tax credit rent, and not up to 110% of HUD's Fair Market Rent as is provided under 24 CFR Part 983.301 for all other PBV units. It is important to note that this exception to the general rent standard of 24 CFR Part 983.301 for those special PBV/LIHTC units will also apply to existing HAP contracts at the time of any adjustment in the rents that may be charged under those HAP contracts. Finally, rents for PBV assisted units may not exceed any other rent limitations that may be imposed (for example, under the LIHTC Program for tax credit units or units that were constructed using funds from the federal HOME Investment Partnerships Program).

    In determining rents, the PHA is to use the most recently published HUD Fair Market Rent in effect and the utility allowance schedule in effect as to the execution of the HAP contract for the PHA's geographic area, or the amounts for each in effect at any time during the 30 day period immediately prior to the beginning date of the HAP contract. The PHA must use the same utility allowance schedule for both its tenant based and project-based voucher programs.

    If the owner desires to increase the rents charged to the PBV assisted units, the request for an increase in the rents must be made by the owner in writing to the PHA and only at the time of the annual anniversary of the HAP contract. The PHA will then determine if the owner is entitled to a rent increase by recomputing the maximum rent that could be charged by an owner under the tests described above. Note that a PHA may determine on its own that there should be a rent decrease if there has been a decrease of five percent (5%) or greater in the HUD Fair Market Rent for the project area, and that rent decrease will apply even if the owner did not request the rent determination (or in fact asked for a rent increase). The new adjusted rent that may be charged by the owner applies for the period of 12 calendar months from the annual anniversary of the HAP contract. In addition to redeterminations based on changes in HUD's Fair Market Rents or requests by the owner, a PHA is required to redetermine the reasonable rent that may be charged by the project owner whenever the HAP contract is amended to substitute different contract units in the same building which is permitted at any time during the term of the HAP contract under 24 CFR Part 983.206(a), as would be the case when the owner decides to allow the PBV units in that building to "float" and therefore not designate specific rental units as the PBV units. In determining the reasonable rent, a PHA must conduct a comparability analysis (either by its own staff or by another qualified person or entity) and consider at least three comparable units in the private, unassisted market; however, those unassisted units may be units in the same project as the PBV assisted units. As a result, it may be desirable for owners receiving PBV assistance to fix the units assisted by the HAP contract to avoid having the PHA being required to redetermine the reasonable rent when the owner desires to transfer the PBV assistance under the HAP contract to a different rental unit.

    The monthly HAP payment by the PHA to the owner for a PBV contract unit that is leased to a qualifying tenant is the rent that the owner is permitted to charge, minus the rent that the tenant is required to pay to the owner under HUD regulations (which is the tenant rent minus the utility allowance); under Section 8(o)(3) of the United States Housing Act of 1937, the tenant's rent contribution is generally limited to forty percent (40%) of the tenant's annual income. If the amount of the utility allowance exceeds the total tenant payment, the PHA shall pay the amount of such excess utility allowance to the owner as a reimbursement for tenant paid utilities and the tenant rent to the owner shall then be zero. If a family moves out of its rental unit, the owner may keep the PBV assistance payment for the month in which the family moves out unless the vacancy was the owner's fault. The PHA may, in its discretion, pay for vacant PBV units for an additional two full months after the tenant vacates the unit. In addition, under 24 CFR Part 983.254, the PHA may, but is not required to, amend the HAP contract to reduce the number of PBV contract units for those PBV units that have been vacant for a period of 120 days or more since the owner provided the PHA a notice of vacancy for such unit(s).

    Under the final PBV regulations at 24 CFR Part 983.257, upon the expiration of the lease for a PBV assisted unit, which lease must, in a change from the proposed March 2004 rule, be for a minimum initial term of one year (and must also contain a HUD-required tenancy addendum), the owner may renew the lease, refuse to renew the lease for "good cause", as defined under 24 CFR Part 982.310, or refuse to renew the lease without good cause. If the owner refuses to renew the lease for good cause, the PHA is obligated to provide the family with tenant based voucher assistance, and that the PBV unit will be removed from the HAP contract.

    Under the final PBV regulations, an owner is allowed to terminate the HAP contract if the amount of rent to the owner for any PBV contract unit, as adjusted under the project-based voucher rules described above (which are set forth at 24 CFR Parts 983.301, 983.302 and 983.303) is reduced below the amount of the initial rent to the owner established by the HAP contract. In such a case, the families that had received the benefit of the project-based voucher assistance will be entitled to tenant based voucher assistance. In addition, under the final PBV regulations, once a family has moved into an apartment that receives the benefit of PBV assistance under a HAP contract, the family, if it moves out voluntarily from that project-based assisted unit after at least one year of residing there, is eligible for assistance under that PHA's tenant based voucher program or another comparable program for rental assistance provided by that PHA. However, families that voluntarily leave the PBV assisted unit before having resided there one year are not automatically entitled to assistance under the PHA's tenant based voucher program.

    All units that are subject to a HAP contract for project-based voucher assistance must be inspected by the PHA to make sure that the units meet HUD's Housing Quality Standards. Such inspections must occur prior to any assistance being paid to the owner for each unit by the PHA under the HAP contract and, with respect to existing housing units, those units must have also substantially complied with the Housing Quality Standards on the date the PHA selected the owner's proposal to receive PBV assistance. In addition, under the final PBV regulations, each year the PHA must inspect a random sample consisting of at least 20% of the PBV contract units in each building that has PBV units to determine if the PBV contract units are being maintained in accordance with HUD's Housing Quality Standards.

    The final PBV regulations are effective as of November 14, 2005. Existing projects which are subject to a HAP contract with a PHA that was entered into before January 16, 2001 are governed by the prior project-based certificate regulations codified as of May 1, 2001 at 24 CFR Part 983. Projects with HAP contracts that were entered into on or after January 16, 2001 are governed by the new PBV regulations, which are also codified at 24 CFR Part 983.