How Are Members Benefiting from the New Section 8 Renewal Guide?

Legislation | June 06, 2016 | by Colleen Bloom

On Aug. 7, 2015, HUD issued the long-awaited Section 8 Renewal Policy Guidebook (the “Guide”).  A FAQ was distributed to HUD field offices on Oct. 30, 2015 to clarify some issues with the updated guide. The FAQ is organized by the chapters in the Guide.  Original analysis by Gates Dunaway can be found at the end of the article, under "Background".

"The key purpose of this [LeadingAge article] update," says Colleen Bloom, "is to highlight some advantageous opportunities outside of electing Option 4, a suggestion which flies in the face of old recommendations and long-standing beliefs dependent on Section 8 policies which go back original renewal policies (which go back to the mid-1990s), when long-term project-based Section 8 contracts first began expiring.  

"Since then, Section 8 policy has evolved dramatically, and the advantages of using Option 4, as authorized for Section 202 properties and other exempt from mandatory mortgage restructuring, have all but been eliminated." 

So, please take a good hard look at further analysis and insights, shared with us by our contracted preservation finance specialist, Gates Dunaway:

How are members benefiting from the new Section 8 Renewal Guide?  

In the past, only for-profit owners were expressly permitted to mark rents up to market [MU2M].  Not-for-profits could only mark up to budget. 

Since HUD issued the updated Guide and FAQ, we have seen a number of members go the MU2M route, which has proven to both be quicker and simpler process, and it avoids the problem of showing a budget to justify the increase.  This can pave the way to a rent increase preceding a refinancing, using the increased rents and net operating income to support the new debt in a more straight-forward fashion. 

Rent increases can also be used to increase reserves, address targeted capital needs (without requiring a full refinance) as well as be used to cover the rising costs of operations.  

[Note that we are still awaiting the revised Chapter 15, as promised back in October 2015, but until then we are relying on the FAQ to guide the MU2M requests.]

However, when proceeding with a MU2M, be aware of the following issues that might arise:

  • 20-Year loan requirement.  The request for a termination and new 20-year contract requires that the owner certify that their financing has at least 20 years remaining on its term.  If no new financing is contemplated, and there is less than 20 years remaining on the current financing, the owner should discuss with HUD the possibility of a waiver to this rule.
     
  • Residual Receipts. If you cannot keep your surplus cash flow, then you will continue to be bound by your “residual receipts” rules.  Therefore, if you receive a significant rent increase but don’t spend the money on new debt, increased R4R, or capital improvements, then the rent increase may only result in a larger residual receipts account at the end of the day. 
     
  • To mature or not to mature?  For those owners with “old regulation” Section 8 contracts and nearing maturity on their original 202 financing, there could be a strategy to proceed with the rent increase now, knowing that at maturity the residual receipts account should be released and surplus cash can be kept.  If the loan requires prepayment permission, which requires a new 20-year 202 Use Agreement, the ability to keep surplus cash is pushed out another 20 years.  This would indicate that the only reason for a rent increase is to refinancing with higher debt, or to increase R4R contributions.  But loop back to the first point above, in terms of needing to certify that the financing has at least 20 years left on the term.  And note another wrinkle…
     
  • Is “debt service savings” required to be shown?  If you have a 202 loan that requires proving that prepayment is to achieve debt service savings, a large rent increase might not be able to be fully maximized if in fact the debt service must be capped at the current debt service.  In this case, there are some methods by which an owner can still benefit from a large rent increase, but it takes careful planning and discussion with the financing and HUD teams.

Members wishing to explore this option more fully are welcome to submit questions to LeadingAge housing staff, or directly to Gates Dunaway. For more background information, read more here