SSection 8 is comprised of two major components: those

News, Analysis and Commentary On Affordable Housing, Community Development and Renewable Energy Tax Credits May 2012, Volume III, Issue V Published by Novogradac & Company LLP A Review of Section 8 By Monica Hilton Sussman, Nixon Peabody SSection 8 is comprised of two major components: those administered by the U.S. Department of Housing and Urban Development s (HUD s) Office of Housing through HUD, state housing finance agencies (HFAs), and project-based contract administrators (PBCAs), which are project-based Section 8; and programs administered by HUD s Office of Public and Indian Housing (PIH), through public housing authorities (PHAs), which include HFAs. Generally, the PIH programs are tenant based but some are also project based. Generally, only households that earn 80 percent of area median income (AMI) or less are eligible to receive Section 8 assistance. In addition, most housing choice vouchers must serve households that are very low-income, i.e., those earning 50 percent of AMI or less. To receive project-based Section 8 assistance, household incomes must not exceed 80 percent of AMI; and income eligibility requirements for Section 8 project based assistance further limit most participants to very low-income families (less than 50 percent of AMI). Finally, there are income targeting provisions in the law that require that 40 percent of the units that are made available for occupancy in any fiscal year under the Section 8 program must be rented to extremely low-income families (those that earn less than 30 percent of AMI), and these provisions apply to both project-based and tenant based assistance. Families typically pay 30 percent of their adjusted income to rent. Office of Housing Section 8 Programs Starting in 1976, HUD provided Section 8 project-based assistance to new construction and substantial rehabilitation projects as well as to HFA financed projects. The contracts had terms and appropriated budget authority generally for 20 to 40 years. The statutory authority for HUD to fund new Section 8 new construction and substantial rehabilitation projects was repealed in October of 1983. Loan Management Set Aside (LMSA) Section 8 assistance was provided to projects with FHA insured or HUD-held mortgages that were in financial difficulty. LMSA continued to receive funding until 1997. The Property Disposition (PD) contracts were provided to projects when HUD disposed of FHA foreclosed multifamily properties. The contract term for most PD projects was 15 years. The Multifamily Assisted Housing Reform and Affordability (MAHRA) Act was enacted in 1997 and amended in the FY 2000 HUD Appropriations Act. MAHRA is Section 8 project-based contract renewal law. All MAHRA renewals, no matter the length of Housing Assistance Payment (HAP) term, are subject to annual appropriations. PIH Section 8 Programs PIH administers the Voucher and Moderate Rehabilitation (Mod Rehab) programs. In 1998, Congress merged the prior certificate and voucher programs into a single program, the Housing Choice Voucher (HCV) program. Households can rent a unit with a rent greater than the fair market rent (FMR) or the payment standard (90 to 110 percent of the FMR) and pay any rent differential even if the family pays more than 30 percent of adjusted income to rent. Although the Mod Rehab program is project-based, it was continued on page 2

novogradac journal of tax credits 2 continued from page 1 enacted and funded within the tenant-based provisions of the Section 8 statute and HUD appropriations. mod rehab project based rental assistance contracts are renewed under MAHRA; however, HUD has not allowed for multi-year mod rehab renewals. MAHRA only allows renewal rents for mod rehabs at the lesser of current rents plus opening cost adjustment factors (OCAF), FMRs or market rent. Households can rent a unit with a rent greater than the fair market rent (FMR) or the payment standard (90 to 110 percent of the FMR) and pay any rent differential even if the family pays more than 30 percent of adjusted income to rent. Project Based Vouchers (PBVs) are a subcomponent of the HCV program. Under the PBV program, PHAs are allowed to use up to 20 percent of their Section 8 funding for PBVs. The projects can be existing housing or new construction; no more than 25 percent of the units in the project can have PBVs, with exceptions for units for elderly or disabled families or families receiving supportive services. Projects must be selected through the PHA competitive selection or if the project has been selected under any competitive federal, state, or local government housing program, whether for development, assistance, community development or supportive services program. The competitive selection relied upon by the PHA must have occurred within three years prior to the PBV selection and must not have taken into consideration the fact that the project would have PBVs. With respect to existing housing, once the PHA determines that the units meet housing quality standards (HQS), those units are deemed existing and therefore can enter into a HAP contract for as many as 15 years. For newly constructed or projects being rehabilitated there will be an agreement to enter into housing assistance payments contracts (AHAP), and a HAP contract is entered into upon completion of construction or rehabilitation. Davis Bacon requirements apply to the latter. Section 8 Project-Based Contract Renewal Options MAHRA generally requires that renewal rents be set at comparable unassisted market rents. FHA-insured projects with Section 8 rents above market are subject to the mortgage restructuring provisions of MAHRA. Section 524 of MAHRA, provides that: continued on page 3 Novogradac Journal of Tax Credits Editorial Board Publisher Michael J. Novogradac, CPA Managing Editor Alex Ruiz Editor Jane Bowar Zastrow Technical Editors Robert S. Thesman, CPA James R. Kroger, CPA Owen P. Gray, CPA Thomas Boccia, CPA Daniel J. Smith, CPA ASSIGNMENT EDITOR Jennifer Dockery Staff Writer Jennifer Hill Contributing Writers Brandi Day Gregory Clements Brad Elphick Tony Grappone Peter Lawrence John Leith-Tetrault CARTOGRAPHER David R. Grubman Production Alexandra Louie Jesse Barredo James Matuszak Forrest David Milder Monica Hilton Sussman Thomas Stass Kimberly Taylor Jillian Toole Novogradac Journal of Tax Credits Information Correspondence and editorial submissions: Alex Ruiz/ 415.356.8088 Inquiries regarding advertising opportunities: Emil Bagalso / 415.356.8037 Editorial material in this publication is for informational purposes only and should not be construed otherwise. Advice and interpretation regarding the low-income housing tax credit or any other material covered in this publication can only be obtained from your tax advisor. Novogradac & Company LLP 2012 All rights reserved. ISSN 2152-646X Reproduction of this publication in whole or in part in any form without written permission from the publisher is prohibited by law.

Novogradac Journal of Tax Credits Advisory Board Bud Clarke Jana Cohen Barbe Tom Dixon Rick Edson Richard Gerwitz Rochelle Lento John Lisella Phillip Melton Thomas Morton Arnold Schuster Mary Tingerthal Rob Wasserman Sharon Jackman Michael Kotin Michael Snowdon Gianna Solari Low-Income Housing Tax Credits Ruth Theobald Probst Kimberly Taylor Ray Landry Boston Financial Investment Management Boston Capital Housing Capital Advisors Inc. Citi Community Capital Dykema Gossett PLLC u.s. Bancorp Community Dev. Corp. Centerline Capital Group Pillsbury Winthrop Shaw Pittman LLP Minnesota Housing Finance Agency Property Compliance SIG Services LLC kay Kay Realty MCA Housing Partners Solari Enterprises TheoPRO Compliance & Consult. Inc. Housing Development Center Housing and Urban Development Sheldon Schreiberg Monica Sussman Frank Altman Merrill Hoopengardner Scott Lindquist Matthew Philpott Matthew Reilein Ruth Sparrow Joseph Wesolowski Don Holm John Leith-Tetrault Bill MacRostie John Tess Ben Cook Jim Howard Forrest Milder Darren Van t Hof New Markets Tax Credits Davis-Penn Mortgage Co. Pepper Hamilton LLP Nixon Peabody LLP Community Reinvestment Fund Advantage Capital JPMorgan Chase Bank NA futures Unlimited Law PC Enterprise Community Investment Inc. Historic Tax Credits Holm Law Firm National Trust Comm. Investment Corp. MacRostie Historic Advisors LLC Heritage Consulting Group Renewable Energy Tax Credits SolarCity Corporation Dudley Ventures Nixon Peabody LLP continued from page 2 the Secretary shall, at the request of the owner of the project and to the extent that sufficient amounts are made available in appropriation Acts, use amounts available for the renewal of assistance under Section 8 of the Act The Section 8 Renewal Policy Guide (renewal guide) implements the MAHRA renewal provisions. In 2010, HUD published a draft major rewrite of the renewal guide, however, it has not been finalized. Generally MAHRA does not address contract term of HAPs, but HUD s policy is not to exceed 20 years. Option 1 Mark-Up-To-Market If rents are below comparable market rents, per a rent comparability study (RCS) they can be marked up to market. The renewal contract must be at least five years. If the project has a passing REAC score (60 or better), is owned by a for-profit, the rents are between 100 and 150 percent of the FMRs and is not to be subject to a low-or moderate-income use restriction that cannot be unilaterally terminated by the owner, it can qualify as entitlement mark-up-to-market. If the project does not meet the entitlement conditions, it may mark up under the discretionary criteria: the project serves a vulnerable population, is located in a low-vacancy area, or has community support. Not-for-profit owners are not eligible to mark up to market under Option 1, but do have comparable options under Chapter 15 of the renewal guide, which provides for a mark-up-to-budget process to refinance and rehabilitate the project. HUD also considers waivers to allow forprofit owners to obtain post-rehab rents through a mark-up-tobudget in accordance with Chapter 15 and Option 2. Option 2: OCAF or Budget-Based Under this option an owner with rents not above market can get a renewal contract at the current contract rents adjusted by the current year OCAF or at budget-based rents, provided that the renewal rents do not exceed comparable market rents. Option 3: Referral to OAHP Projects that have FHA-insured mortgages and rents above comparable market rents are referred to HUD s Office of Affordable Housing Preservation (OAHP). The FHA mortgage may be restructured or the rents may be lowered without restructuring. Restructuring involves the reduction and bifurcation of the mortgage to an amount that can be supported by the lower market rents and the balance is reflected in subordinate debt held by HUD. These properties are required to enter into a long-term use agreement and a 20-year HAP contract. continued on page 4 novogradac journal of tax credits 3

novogradac journal of tax credits continued from page 3 Option 4: Exception Projects Exception projects including Section 202s, Section 515s, non-fha state and local financed projects, and FHA insured state or local-governments financed projects, which cannot be prepaid due to state or local law, are eligible to have their rents renewed at the lesser of the existing rents plus an operating cost adjustment factor, or a budget-based rent. At each subsequent renewal, but no adjustment during a multi-year HAP under Option 4, the project will be subject to this lesser of test. Option 5: Preservation and Demonstration Projects This option applies to Section 236 and Section 221(d) (3) below market interest rate (BMIR) projects that participated in the low-income houseing preservation programs ELIHPA or LIHPRHA. LIHPRHA provided owners with incentives such as equity take-out loans and increased Section 8 rents in return for longterm affordability restrictions. MAHRA provides that renewal rents will be set to provide owners with the same incentives and benefits provided for under LIHPRHA. This option also applies to projects that were restructured under restructuring demonstration programs that preceded MAHRA. Option 6: Opt Out An owner who chooses to opt out of the Section 8 program must provide HUD and the tenants a one-year notice. It should be noted that a number of states have imposed additional notice requirements for owners that intend to opt out of their Section 8 HAP contracts. At opt-out, the tenants will receive Section 8 housing choice vouchers. If tenants choose to remain in their unit and the market rents for the project are higher than the PHA s payment standard, the vouchers will be enhanced or sticky vouchers. Rent Adjustments During the term of multi-year HAPs, rents generally are adjusted by OCAF, or in certain cases on a budget basis. For Option 1 or 2 projects, a new RCS is required every five years and rents will be adjusted up or down to keep them in line with the comparable market rents. Other Section 8 Programs Mod rehab single room occupancy (SRO) units are eligible for renewal under Option 4 as exception projects. The Shelter Plus Care (S+C) program is a grant program run by participating city and state governments, which in turn make grants to housing providers. Congress has been appropriating one-year renewal funds. RAD In March HUD published a draft notice to implement the Rental Assistance Demonstration (RAD) program authorized by the 2012 HUD Appropriations law. Under RAD s first component, RAD would permit through a competitive process the conversion of 58,750 units of public housing to 15-year PBV or a new 20-year project-based rental assistance contracts (PBRA) which would be administered by the Office of Housing. RAD also contemplates that mod rehab unit owners may compete for RAD conversion of as many as 1,250 units nationwide on a competitive basis. In addition, on a noncompetitive basis RAD would permit mod rehab RAP and Rent Supp owners to covert enhanced vouchers provided at HAP termination, both prospectively and retroactively from 2006, to a 15-year PBV HAP contract. The PBVs under RAD are not subject to the standard 20 percent PBV cap or the PHA selection process. The RAP and Rent Supp provision are immediately implemented. The mod rehab and public housing provisions will become effective in the summer. Monica Hilton Sussman is a former HUD executive with nearly 30 years of experience in real estate, Section 8, FHA Multifamily programs and affordable housing law. She focuses her practice in all types of real estate transactions and housing and community development law. She can be reached at msussman@nixonpeabody.com or 202-585-8833. This article first appeared in the May 2012 issue of the Novogradac Journal of Tax Credits. Novogradac & Company LLP 2012 - All Rights Reserved Notice pursuant to IRS regulations: Any U.S. federal tax advice contained in this article is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code; nor is any such advice intended to be used to support the promotion or marketing of a transaction. Any advice expressed in this article is limited to the federal tax issues addressed in it. Additional issues may exist outside the limited scope of any advice provided any continued on page 5 4

continued from page 4 such advice does not consider or provide a conclusion with respect to any additional issues. Taxpayers contemplating undertaking a transaction should seek advice based on their particular circumstances. This editorial material is for informational purposes only and should not be construed otherwise. Advice and interpretation regarding property compliance or any other material covered in this article can only be obtained from your tax advisor. For further information visit www.novoco.com. novogradac journal of tax credits 5