News

Section 202 Projects May be Impacted by Changes to HUD HAP Contract Renewal Procedure

Several changes made to the housing assistance payments (HAP) contract renewal process may have a significant impact on owners of Section 202 properties. These changes were outlined in Notice 2012-08 and clarified on the Frequently Asked Questions section of the HUD website.   Historically, Section 202 projects have been exempt from the Multifamily Assisted Housing Reform and Affordability Act of 1997 ("MAHRAA"). Because of this exemption, 202 owners could renew HAP contracts at above market rent using Option Four of the Section 8 Renewal Guide. HUD approved the rent requests based on submitted budgets, without regard to comparable market rents.   Under the new guidelines, budget based rent increases are not permitted if the requested rents exceed comparable market rents. This change affects all Section 202 owners with an Option Four Contract. Another change is that current debt service must now be used in the operating budget, meaning that owners who have refinanced 202 properties - or are planning on refinancing - could face a rent reduction. Historically, Section 202 owners used refinancing as a way of reducing debt service and then providing additional resident services. It is likely that such savings will be eliminated at the next HAP contract renewal.   Under the revised rules, owners of 202 properties with Option Four contracts will be able to request an annual rent increase through an OCAF adjustment or through a budget-based request. However, if rents are above market (as determined by a rent comparability study), a budget-based increase will not be approved, and the rent increase will be limited to the OCAF adjustment. This can have a serious impact on operations if the OCAF does not actually provide the rent required to meet operating expenses.   How Should 202 Owners Prepare for These Changes?   First, create a budget that uses current debt service, annual replacement reserves, and mortgage insurance premium. If there is a cash surplus after including all these items in the budget, the property could face a rent reduction at the next HAP contract renewal. If you own a 202 property and have refinanced at higher interest rates, consider proactively renewing with a new 20 year HAP contract. This could be followed by a second refinance at a lower rate and lower debt service. Also, be cognizant of market rents; if rents are above market, you will only be eligible for OCAF adjustments. The best advice for those owners considering a 202 refinance is to work closely with the lender to determine the impact on rents. If the decision is made to refinance, work closely with HUD production and asset management and the Contract Administrator to properly structure the refinancing.

Administration Proposals to Improve the LIHTC Program

As part of its 2014 budget, the Obama Administration has made five specific proposals relative to the LIHTC Program.   Allow states to convert some of their authority relating to the issuance of tax-exempt bonds into additional tax credits. (This would be a particularly useful tool to states with excess demand for tax credits and more bond issuing authority than needed); Allow projects to comply with an income-averaging rule: Income limits for at least 40% of the units in a project could average no more than 60% of AMI; No tax credit unit could be occupied by a household with income above 80% of AMI; Special rules would apply to HUD or RD projects, as follows: i. If a tenant qualified of a HUD or RD project when they originally moved in, they will be considered LIHTC qualified as long as their income does not exceed 80% of AMI. Change the formula regarding the present value calculation of the 4% and 9% credits to produce more credit that is available under the current formula; Add preservation of federally assisted affordable housing to the selection criteria for a States Qualified Allocation Plan (this would be required of all states); and Make the use of the LIHTC more attractive to REITs, in order to increase the demand for credits. These are important proposals and will improve the efficient use of the credits. It is recommended that all operators of LIHTC properties encourage their Senators and Representatives to support these proposals to encourage continued development of affordable housing.  

Bipartisan Policy Center Recommendations

The Bipartisan Policy Center was founded in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole, and George Mitchell for the purpose of developing and recommending sound solutions to national problems. The Center has recently issued a report titled Housing America s Future: New Directions for National Policy. The panel that made the recommendations contained within the report consisted of George Mitchell, former Senator Kit Bond, and former HUD Secretaries Henry Cisneros and Mel Martinez.   The Plan includes many recommendations, a number of which would impact affordable housing programs, including the LIHTC program. Major recommendations in these areas include the following:   Replace Fannie Mae and Freddie Mac with a government Corporation that would provide a limited catastrophic guarantee for single and multifamily loans and securities; Expand the annual amount of 9 percent tax credits by 50%, but possibly with a different allocation formula; E.g., additional credits could be allocated based on a state s share of cost-burdened renters; or Base the allocation on the relative size of a state s renter population. (Either of these would be an improvement in the current allocation process, which does not recognize the relative needs of different states). Increasing appropriations for HUD s HOME program to provide additional gap financing for LIHTC projects and for emergency assistance; Limit the use of vouchers to households at or below the 30% AMI level (current limit is 80% of AMI), although people up to the 80% level could still be assisted in emergencies, such as job loss or medical conditions; Require greater accountability for HUD rental assistance programs and reward better performance by housing providers; and Continue homeownership tax incentives. While proposals like this are not binding on Congress, they are indicative of the broad bipartisan support for the LIHTC program. Developers and operators of LIHTC housing are encouraged to contact their House Members and Senators and encourage their support of the recommendations outlined in the report.

A Primer on Pre-Paid Debit Cards

Federal and State governments are rapidly moving away from cash and paper checks and going to the use of pre-paid cards. Such cards enable consumers without bank accounts to benefit from the shift to electronic transactions from cash and to financially mainstream.   As most operators of HUD, Rural Development, and LIHTC properties know, as of March 1, 2013, recipients of Social Security, SSI, veterans benefits and federal government pensions are paid through either direct deposit into a bank account, or a pre-paid debit card - the Direct Express Card. This is part of a broad trend toward electronic transactions replacing cash and paper checks.   The Federal Deposit Insurance Corporation (FDIC), estimates that 17 million adults in America do not have a checking or savings account. This is about 8 percent of all households.   Pre-paid cards are becoming a familiar product for an increasing number of Americans. 41 states and D.C. use pre-paid cards to distribute unemployment benefits. Several states also use pre-paid cards for tax refunds, although for now, federal tax refunds are still distributed by check.   A wide variety of pre-paid cards exist. Following are some of the more common types:   Government Issued Pre-Paid Cards: These have been available for more than ten years, both to access in-kind benefits such as Supplemental Nutrition Assistance ("SNAP") and to replace cash. The cards provide either paper statements to show card activity or access to a 60-day written account history by request. Prepaid Payroll Cards: A growing number of employers issue prepaid cards - known as payroll cards - to workers who choose not to enroll in direct deposit programs. One such employer is Walmart, which in 2009 began issuing payroll cards to its employees. General Purpose Reloadable Prepaid Cards: These cards are issued both by traditional banks and other distributors such as GreenDot and NetSpend.   For housing purposes, HUD has indicated that these prepaid cards should be treated in a manner similar to savings accounts, in that the current balance (within 120-days of the certification effective date) should be considered as a cash asset. Virtually all of these cards permit verification of current balances by ATM, phone, or computer printout. Managers should accept such documentation as verification of the value of the prepaid card account.

Calculating Income When There is a Combination of Employment & Unemployment

Calculating Income When There is a Combination of Employment & Unemployment   Managers of affordable housing properties are often unsure of how to calculate an applicant's income when it is expected that the applicant will receive income from both employment and unemployment. Information contained in HUD Handbook 4350.3, Change 3 provides guidance on how such calculations should be made. Ironically, much of the confusion on this issue is also the result of guidance in the same Handbook. Paragraph 5-5.A.1 states "Income that may not last for a full 12 months (e.g., unemployment compensation), should be calculated assuming current circumstances will last a full 12 months." Based on this language, many managers believe that no matter what, unemployment compensation must be annualized. However, that is only the case when there is no indication that the present circumstances of the household (i.e., the unemployment), will change. Paragraph 5-5.A.2. indicates that if changes are expected during the year, that information should be used to determine the total anticipated income for the year. The handbook goes on to show various examples of how such a calculation would be accomplished. Following is an example (not in the Handbook) that may assist managers in their understanding of how to do this calculation:   >An applicant is currently receiving unemployment compensation of $300 per week, and based on the award letter in from the Department of Labor, ten weeks of benefits remain. Normally, this income would be calculated based on a full year, or $300 times 52 weeks for a total income of $15,600. However, this applicant has a job offer for a job that will start in the third week after move-in, paying $500 per week. So, in this case, unemployment will only be received for two weeks after move-in, at which point employment income will begin. Based on this, the proper calculation of income is as follows: *Unemployment: $300 times two weeks = $600; *Employment: $500 times 50 weeks = $25,000; *$25,000 plus $600 = $25,600. $25,600 is the anticipated income for the upcoming year and is the amount that should be shown on the certification. While the method outlined here should be used in all cases for tax credit properties, properties with HUD or Rural Development rental assistance have an option. Those properties may use the method shown here, or annualize the unemployment compensation for a full year, and then perform an interim recertification when the household circumstances change. Even for these properties however, the first method shown is preferred, since it eliminates the need for an interim.    

Handling Income from Investment Accounts

As most operators of housing under HUD, Rural Development, and the Low-Income Housing Tax Credit Programs know, there is a considerable difference of opinion in our industry regarding the handling of investment accounts from which regular distributions are taken. This difference is the result of conflicting information - or at the very least - a lack of clarity, in HUD Handbook 4350.3, Change 3, which is the basic guidance on income determination for all these programs. After much back and forth with HUD, and a full analysis of all related regulation, I have an opinion on what we should be doing, and a recommendation for my clients as to how they should approach the issue. Before going into either of those though, let me explain the various contradictions.   Exhibit 5-2 of HUD Handbook 4350.3 states that the references are current as of the date of publication (which for this exhibit was June 2007). It states that readers should refer to the latest edition of the Code of Federal Regulations (24 CFR Part 5.603), which I will get into later. This exhibit states that assets include individual retirement accounts, 401k accounts and Keogh accounts, when there is access to the funds. If occasional withdrawals are made, the distributions should not be counted and the account should be valued using a six-month average balance (similar to a checking account). For example, a person has a $30,000 Keogh account and, at age 70, begins withdrawing $2,000 annually. Per the example provided by HUD, this should be counted as an asset and the $2,000 should not be counted as income (this appears to contradict Chapter Five of 4350.3, which I will get to shortly). Under Retirement & Pension Funds, Exhibit 5-2 states that if employed, only the amounts that can be withdrawn without quitting or retiring should be included as an asset. If retired, terminated, or if funds are withdrawn, Periodic receipts are counted as income; and Lump sum receipts are treated as assets. If benefits will be received through periodic payments, they should be counted as income, and any remaining amounts in the account should not be counted as an asset. If a lump sum is received, followed by periodic payments, count the lump sum as an asset and treat the periodic payments as income. In following years, count the periodic payments as income and do not count any remaining amount as an asset. (Note - if the lump sum represents a delayed periodic payment, it is income). The following example is provided by HUD: A person retires, receiving a lump sum payment and then getting regular payments. The lump sum (to the extent not spent) is an asset. The person is now not able to withdraw the balance (this part of the example seems to indicate that the lack of access is the reason it is no longer an asset, which reflects the actual CFR). The regular payment is income and the pension is not listed as an asset. Under what assets do not include, Exhibit 5-2 lists assets that are not accessible to the applicant and provide no income to the applicant (again, a key appears to be accessibility). Handbook 4350.3, Chapter 5, Section 5-6.L The full amount of periodic payments from annuities, insurance policies, retirement funds, pensions, and disability or death benefits is included in annual income. (This paragraph references subparagraph "O" for information on the withdrawal of cash or assets from an investment, but it should actually be subparagraph "P"). Subparagraph P states that withdrawal of cash or assets from an investment are treated as follows: If received as periodic payments, count as income; Lump sum receipts are treated as assets; and If the payments are periodic, remaining amounts in the account are not treated as assets. (It is the unequivocal nature of this statement that has caused so much uncertainty in the industry. From this statement, one would assume that even if the applicant had access to the account, it would not be counted as an asset, since HUD provided no exception to the statement). However, Section 5-4, C states that annual income includes amounts derived from assets to which any member of the family has access. The ultimate guidance to be relied on is the Code of Federal Regulations (CFR). The CFR is the codification of the general and permanent rules and regulations published in the Federal Register by the executive departments and agencies of the federal government, and is sometimes referred to as "administrative law." Such law takes priority over other guidance that may be issued by federal agencies, such as handbooks, and in the event of conflict, the CFR prevails. The only authority that supersedes the CFR is the enabling statute or statutory authority.   The requirements for the determination of income for HUD programs is contained at 24 C.F.R. 5.609. Specific to the issue at hand is 5.609(b)(3), which states that any withdrawal of cash or assets from an investment will be included in income, except to the extent the withdrawal is reimbursement of cash or assets invested by the family (emphasis added). Based on this wording, if a household can demonstrate that it has not yet withdrawn the amount it invested in an investment account, none of the withdrawals should be counted as income.   While the HUD Handbook 4350.3 is certainly not clear on this issue, and may well contradict the CFR, HUD does seem to be taking an information position that is in concert with the CFR. In the "General Income and Rent Determination Frequently Asked Questions" section of the HUD website, as of March 17, 2013, the issue was addressed by question #12, as follows: 12. Question: If a tenant puts $10,000 in an IRA, and 10 years later the IRA was worth $15,000 and that tenant began withdrawing monthly amounts from the IRA, are the amounts withdrawn considered income? Answer: The withdrawal of cash or assets from an investment that is received as periodic payments should be counted as income, unless the family can document and the PHA verifies that amounts withdrawn are reimbursement of amounts invested. When a family is making a withdrawal from an account in which it has made an investment (e.g. annuity, IRA, etc.), the withdrawals will count as income only after the amount invested has been totally paid out. This interpretation is consistent with the 24 CFR 5.609(b)(3). From a policy perspective, counting the regular distributions from investment accounts as income makes sense. If someone withdraws $20,000 or more per year from an IRA, it is not unreasonable to expect that they will pay rent based on that income. However, that is not what the CFR requires, and until a change is published in the Federal Register, I can find no authority for HUD to alter the methodology for determining income from investment accounts. As to how managers and owners should proceed relative to this rule, my advice is to follow the guidance of your Contract Administrator (for Section 8 properties), Rural Housing Service representative (for Section 515 properties) and State HFA (for LIHTC properties). In the meantime, we will continue to seek more formal guidance from HUD than an example in the FAQ section of their website.  

HUD and HHD Introduce New Program for Disabled Low-Income

On February 12, 2013, the Department of Housing & Urban Development (HUD) and the Department of Health & Human Services (HHS) announced $98 million for 13 state agencies to provide rental assistance to persons with incomes at or below 30 percent of the area median income who are also disabled. Many of these persons are transitioning out of institutions or are at high risk of homelessness. The funding comes through the Section 811 Project Rental Assistance Demonstration Program (PRA Demo). The goal of the program is to enable extremely low-income persons to live in integrated mainstream settings. The following state agencies have been awarded rental subsidy through the PRA Demo program: California Housing Finance Agency, $11,870,256 - 335 units; Delaware State Housing Authority, $5,100,753 - 170 units; Georgia DCA, $4,160,771 - 150 units; Illinois Housing Development Authority, $11,982,009 - 826 units; Louisiana Housing Corp., $8,254,097 - 200 units; Massachusetts DHCD, $5,276,452 - 100 units; Maryland DHCD, $10,917,383 - 150 units; Minnesota Housing Finance Agency, $3,000,000 - 95 units; Montana Dept. of Commerce, $2,000,000 - 82 units; North Carolina Housing Finance Agency, $12,000,000 - 562 units; Pennsylvania Housing Finance Agency, $5,707,800 - 200 units Texas DH&CA, $12,000,000 - 385 units; and Washington Dept. of Commerce, $5,580,280 - 275 units This program provides project based rental assistance to develop permanent affordable housing options in integrated settings for extremely low-income persons with disabilities. Owners and developers in the listed states interested in this program should contact the appropriate state agency for information. If you are interested in details about a particular state program, please feel free to contact me.

HUD Creates Fair Housing App for iPhone and iPad

On February 28, 2013, HUD released a housing discrimination mobile application for iPhone and iPad. The App is designed to provide the public with a quick and easy way to file housing discrimination complaints and to inform the public of their basic rights under fair housing law. I have reviewed the App in detail and it will clearly be a useful new tool for fair housing and civil rights groups in providing their clients with an easy way to file complaints against housing operators and owners. From a HUD standpoint, the App will ease the process for filing fair housing complaints. From the point of view of housing operators, the App may significantly increase the volume of frivolous complaints. The ease with which the general public will be able to file complaints makes ongoing fair housing training more important than ever. The App also provides a simple overview of the fair housing complaint process and this feature alone makes it a worthwhile download for owners and managers (the download is free). To download the App, click here or go to the Apple App store and search "Housing Discrimination."