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Department of Housing and Urban Development

Recommendations and Actions

HUD08: Reduce Section 8 Contract Rent Payments

Background

Under the Section 8 Substantial Rehabilitation and New Construction Programs, HUD enters into annual rental contracts with multi-family housing owners. The program also provides that owners of assisted housing can receive annual rent adjustments (increases) to keep pace with inflation. Initially, these increases were automatic, based on HUD's annual housing costs surveys, consumer price index data and other factors. Specifically, Section 8 (c)(2) of the National Housing Act amended provides that:

(1) The assistance contract shall provide for adjustment annually or more frequently in the maximum monthly rents for units covered by the contract to reflect changes in the fair market rentals established in the housing area for similar types and sizes of dwelling units or, if the Secretary determines, on the basis of a reasonable formula; and

(2) Adjustments in the maximum rents as provided shall not result in material differences between the rents charged for assisted and comparable unassisted rents, as determined by the Secretary.

Throughout the 1980s, HUD attempted to enforce this comparability provision by conducting surveys of rents for comparable non-assisted units to determine whether rents resulting from application of the Annual Adjustment Factor (AAF) satisfy the comparability provision. The statute prohibits HUD from using the results of a comparability study to reduce rents when it finds that comparable market rents for similar unassisted housing are below the AAF-adjusted levels. In such instances, HUD can only hold rents constant. The AAF generally provides owners with larger increases than might be attributable to their actual increases in costs, due to such factors as the fixed nature of debt service and other costs.

The comparability provisions have been challenged by several owners and, although some lower courts have been supportive of HUD's authority in this regard, appellate decisions have greatly complicated the issue. The Ninth Circuit Court, in Rainier View Associates v. HUD, upheld the plaintiffs in a case which challenged HUD's authority to base rent increase decisions on comparability studies. The plaintiffs claimed that HUD is not permitted to use any method other than rent increase factors based on a reasonable formula to adjust rents. The initial District Court decision said HUD could perform comparability studies but lacked uniform national instructions. The Ninth Circuit overruled the lower court.

Partly in response to this case, Congress passed Section 801 of the HUD Reform Act of 1989 which: (1) provides for partial retroactive payments and prospective contract rent determinations where comparability studies affected rent increases in the past, and (2) recognizes HUD's authority to base rent increases on comparability studies but requires the department to develop regulations for their future use. HUD imposed a moratorium on all comparability studies until regulations were published which, as of this date, has not been accomplished.

In April of this year, another court interpreted the comparability provision as reaching far beyond HUD's past practice. The U.S. Claims Court in Park Village Apartments v. The United States ruled that comparability studies must also be used to increase rents above the adjusted AAF rent following a request from an owner for a comparability study, and a finding that comparable rents are above the adjusted AAF rent.

In May of this year, the Supreme Court finally settled the issue of HUD's authority to use comparability studies in Alpine Ridge v. HUD. In that case, the Court ruled that HUD can use comparability studies to assist in determining Section 8 contract rent levels. However, the court also ruled that owners could still, on an individual basis, challenge the results of a HUD comparability study.

Actions

1. HUD should be given legislative authority to discontinue its use of comparability studies to determine annual contract payments.

2. HUD should be given legislative authority to base its annual contract rental rate increases on actual increases in costs to the owners, not on the more broadly based housing costs index and comparability methods.

3. HUD should be given legislative authority to require owners to document and justify all operating costs, so that requested increases to cover certain costs, e.g., taxes and fuel, can be offset, if appropriate, against known reductions in other costs, such as debt service or maintenance.

Implications

By using a budget/cost-based method that limits annual rent adjustments to narrower, justifiable increases in operating costs, rather than a broader housing costs index within metropolitan areas, future year costs will reflect smaller rates of increases. This will result in lower actual outlays than would have occurred under the Annual Adjustment Factor/Comparability methods.

The cost/budget-based method will also permit better use of staff resources. HUD staff will no longer be required to develop, publish, and implement the AAF programs. It will also eliminate the time required to conduct comparability studies, support findings, and process appeals and potential litigation. Staff needed to perform all of the foregoing activities would far outweigh the staff time needed to review budgeted rent increase requests, especially in light of the effort underway to automate the budget review process and have the owners submit their requests electronically.

Fiscal Impact

The costs of implementing comparability studies under the various court opinions that permit owner requests and challenges to comparability methodology would, in all probability, exceed any savings. It is a potential legal and administrative morass that would drain substantial HUD budget and personnel resources during a period when HUD is already seeking to do more with less. Assuming that the index-based annual rent increases have averaged three percent in the past, a reduction of one-half of a percent would yield the following savings.

Budget Authority (BA) and Outlays (Dollars in Millions) 
Fiscal Year

1994 1995 1996 1997 1998 1999 Total ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ BA n/a -15.0 -30.0 -45.0 -60.0 -75.0 -225.0

Outlays n/a -15.0 -30.0 -45.0 -60.0 -75.0 -225.0

Change in FTEs n/a 0 0 0 0 0 0

n/a = Not applicable (recommendation improves efficiency or redirects resources but does not directly reduce budget authority).

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