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In May of 2012, the U.S. Department of Housing and Urban Development (HUD) moved forward with capping Option 4 budget-based rent adjustments by a rent comparability study.
Page changes were issued also requiring the use of new debt service calculations in budgets. This move effectively eliminates cash flow from debt service savings owners may have been counting on following a refinancing.
We continue to argue this, and the RCS cap changes, so far with little hope of success. Under the Section 8 renewal guide page changes, Operating Cost Adjustment Factors (OCAF) changes for Option 4 contracts will continue to be available without a rent-comparability study. Inital deadlines for implementation were inconsistent, so we requested clarfication.
Additionally, HUD has made substantial changes to Chapter 9, imposing new "special procedures" that will come to play when an RCS shows that market rents exceed 110% of Small Area Fair Market Rents (SAFMR) in metropolitan areas or Fair Market Rents (FMR) in non-metropolitan areas.
Challenges were filed on this as well, because SAFMR is not widely used, it layers burdensome and costly supplemental justification requirements on owners/appraiser, and it did not include sufficient detail to accurately and consistently implement.
In a HUD memo dated Sept. 7, 2012, however, HUD suspended such portions of the May 18 Section 8 renewal guide pages changes that relate to small area FMRs as part of rent comp studies.
HUD clarified on June 27 that the effective date for capping Option 4 budget-based rent adjustments at comparable market rents is Oct. 15, 2012. HUD's clarification also specified that "[a]ny budget-based rent increase request postmarked prior to October 15, 2012, can be processed under the previous guidance. Any budget-based rent increase postmarked Oct. 15, 2012, or thereafter must abide by the new guidance. This new requirement applies to all Option 4 contracts, even multiyear contracts signed prior to May 18, 2012."
Though still awaiting a promised revision of the entire guide, HUD moved forward in May with its release of 5 substantive “page changes” to the Section 8 renewal guide.
As part of this update, HUD posted a consolidated revision to the guide with all its many changes to date on: Section 8 contracts.
According to the transmittal, HUD will "permit rent adjustments in a multiyear contract using a budget basis only if the proposed rents do not exceed comparable market rents for Option 4” and "owners must use current debt service when submitting a budget-based rent increase request."
The new policy is detailed in Section 6-3.B and applies to those budget-based adjustment requests submitted 150 days following the effective date. According to a clarification issued by HUD on June 27, the effective date is October 15, 2012.
HUD further clarified that "[a]ny budget-based rent increase request postmarked prior to October 15, 2012 can be processed under the previous guidance. Any budget-based rent increase postmarked October 15, 2012 or thereafter must abide by the new guidance. This new requirement applies to all Option 4 contracts, even multiyear contracts signed prior to May 18, 2012."
This is a major change in policy and practice for Option 4 contract renewals and anniversary adjustments.**
So, starting in October 2012, when submitting a budget-based rent increase requestunder Option 4, owners will have to include a rent comparability study (RCS) demonstrating that requested budget-based rent increases will not take the property rent levels above market comps, and include current debt service.
If the RCS demonstrates that current rents are above comparable market rents, the request for a budget-based rent adjustment will be denied, and the owner will only receive an OCAF rent adjustment.
Additionally, HUD has made substantial changes to Chapter Nine, imposing new "special procedures" that will come to play when an RCS shows that market rents exceed 110% of Small Area Fair Market Rents (SAMFR) in metropolitan areas or Fair Market Rents (FMR) in non-metropolitan areas. [Note: this provision was suspended on Sept 7, 2012 - but is expected to be activated in the future when clarifying guidance is available.]
This also applies to RCSs signed by the appraiser following 150 days of issuance of the policy (again, October 15, 2012).
Detailed instructions related to Rent Comparability Studies can be found in Chapter 9.
Anyone needing to commission a first-time rent comparability study is encouraged to contact us for a detailed fact sheet currently being updated which explains how the rent comparability study is meant to take into account the market value of such things as supportive services provided at or received by residents at senior housing communities.
The other 4 changes are preservation driven changes that will allow for:
HUD moved forward with these pages changes ahead of a full revision to the guide because they impact the bottom line.
This is yet another reminder of HUD’s desire and active steps being taken to constrain the growth of existing subsidy programs.
As with some other recent efforts, not all steps being taken or proposed are non-controversial.
** NOTE: OCAF adjustments for Option 4 contracts will continue to be available without a rent comparability study. Owners operating under Option 4 desiring only OCAF changes will, in the near future (if not already), be able to take advantage of the paperless and streamlined “auto-OCAF” submission process.