The Section 8 Program was authorized by Congress in 1974 and developed by HUD to provide rental subsidies for eligible tenant families (including single persons) residing in newly constructed, rehabilitated and existing rental and cooperative apartment projects.
The rents of some of the residential units are subsidized by HUD under the Section 8 New Construction ("New Construction"), Substantial Rehabilitation ("Substantial Rehabilitation") and/or Loan Management Set-Aside ("LMSA") Programs. All such assistance is "project-based", i.e.; the subsidy is committed by HUD for the assisted units of a particular Mortgaged Property for a contractually determined period.
The New Construction and Substantial Rehabilitation Programs provide rental assistance in connection with the development of newly constructed or substantially rehabilitated privately owned rental housing financed with any type of construction or permanent financing, including the applicable FHA Multifamily Mortgage Insurance Programs. The maximum term of assistance provided by HUD under the New Construction and Substantial Rehabilitation Programs for a project financed with the proceeds of a loan insured by FHA is 20 years. For any mortgaged property which received a notice of selection from HUD for New Construction or Substantial Rehabilitation assistance prior to November 15, 1979 or February 20, 1980, respectively, the subsidy is made available to the project owner in five-year increments, subject to renewal at the owner's option at the end of each five-year incremental term for a further five years or until the end of the maximum term of assistance; for projects which received a notice of selection for New Construction or Substantial Rehabilitation assistance from HUD on or after such dates (collectively, the "New Regulation Projects"), the subsidy is generally committed to the project for a single 20-year term without provision for owner cancellation of the assistance prior to expiration of the term. The Housing and Urban Rural Recovery Housing Act of 1983 repealed the statutory authority for the New Construction and Substantial Rehabilitation Programs.
The LMSA Program was developed by HUD primarily to provide financial assistance in the form of rental subsidies to multifamily properties subject to FHA insured mortgage loans which are in immediate or potential financial difficulty; and thereby to reduce the volume of mortgage loan defaults as well as claims for FHA mortgage insurance benefits from private lenders holding the FHA insured mortgage loans on such projects. HUD also provides rental assistance under the LMSA Program to properties subject to mortgage loans held by FHA. HUD is authorized to make a commitment of LMSA assistance to a mortgaged property for a maximum fifteen year period; such assistance to be made
Available to the owner in five year increments, subject to renewal at the end of each five-year period at the owner's option, with the approval of HUD. In recent years, HUD has provided LMSA assistance for a maximum single five-year term; however, at this time Congress has not appropriated the necessary funds to enable HUD to provide any new contracts for LMSA assistance except in the context of one year renewals of expiring existing LMSA agreements.
HUD provides Section 8 rental subsidies to the owners of certain mortgaged properties pursuant to a HAP Contract. The entity responsible for the administration of the Section 8 assistance pursuant to a particular HAP Contract is the designated "Contract Administrator". Under the New Construction and Substantial Rehabilitation Programs, either HUD or a "Public Housing Agency" may serve as Contract Administrator. As defined under applicable HUD regulations, a "Public Housing Agency" is any State or local governmental instrumentality that is authorized to engage in or assist in the development or operation of housing for low-income families. Pursuant to applicable HUD regulations, HUD acts as the Contract Administrator for LMSA assistance, but has the authority to contract with another entity for the performance of some or all of its responsibilities as Contract Administrator. HUD currently serves as the Contract Administrator under the HAP Contracts for almost all the assisted Mortgaged Properties. At present, HUD intends that HAP Contract administration for the assisted Mortgaged Properties will be conducted and coordinated by the HUD offices located in Denver, Colorado, Des Moines, Iowa and Atlanta, Georgia. However, in the future, the responsibilities of HUD as Contract Administrator under the HAP Contracts may be assumed by other HUD offices or by Public Housing Agencies.
HAP Contracts specify the number of units in a particular mortgaged property for which Section 8 assistance will be provided. Under the HAP Contracts, HUD provides Section 8 rental subsidies to the project owners in an amount equal to the difference between the HUD approved rent (the "Contract Rent") for a particular assisted unit and the HUD required rental contribution from eligible tenant families. The Housing Act prescribes as the requisite tenant rental contribution an amount equal to the greatest of (i) 30% of the tenants' family monthly adjusted income, (ii) 10% of the tenants' family monthly gross income, and (iii) if the tenant family receives welfare assistance from a public agency and a portion of such assistance is adjusted in accordance with the family's actual housing costs, the monthly portion of the welfare assistance so adjusted. For Section 8 assisted units for which the cost of utilities is not included in rent, the tenant rental contribution includes the amount of HUD's estimate of the average monthly cost of utilities and other services (excluding telephone) for the unit in question (the "Utility Allowance").
Tenant Admission and Occupancy Criteria
Section 8 rental subsidies are provided to project owners on behalf of families that are eligible low-income families at the time of their admission by the project owners to the program. Under the Housing Act, "low income families" are defined as those families whose annual incomes do not exceed eighty percent (80%) of the median income for the area in which the project is located, adjusted for family size, as determined by HUD at least annually. Pursuant to the Housing Act, not more than 25% of the units in an assisted mortgaged property may be made available for occupancy by low income families other than "very low income families" (as herein defined); except with respect to any project in which such low income families occupied more than 25% of the units in the affected project as of November 28, 1990. In addition, the applicable HUD regulations prohibit, without prior HUD, approval, the admission of any low-income family other than a very low-income family to any project subject to a HAP Contract in effect on or after October 1, 1981. A "very low income family" is defined as a family whose annual income is at or below 50% of the median income of the area in which the project is located, adjusted for family size.
Under the Section 8 Program, tenant selection is regarded as the responsibility of the owner of an assisted mortgaged property, subject to compliance by such owner with the applicable income eligibility criteria and certain occupancy requirements, including those pertaining to projects designated for elderly and non-elderly disabled families. In addition, applicable HUD regulations restrict the availability of Section 8 assistance to citizens of the United States and noncitizens of the United States who have achieved certain eligible immigration status. Project owners are prohibited from discriminating against applicants on the basis of family's status, as well as race, sex, creed, religion, age or disability.
In consideration for the receipt of Section 8 assistance, the HAP Contracts impose certain general obligation on the owners of assisted properties including; (i) the leasing of assisted units to Section 8 income eligible families, (ii) the maintenance of the project as decent, safe and sanitary housing for the residents, (iii) compliance with applicable nondiscrimination and equal employment opportunity requirements, (iv) compliance with Section 8 reporting, management and accounting requirements, and (v) the procurement of the prior written approval of HUD and the Contract Administrator to any transfers of the project or any portion thereof and any assignment of the HAP Contract.
New Construction and Substantial Rehabilitation HAP Contracts also require the prior approval of HUD and the Contract Administrator of any refinancing of the exiting project indebtedness, which includes any modification or restructuring of the debt. In addition, pursuant to the Housing Act, an owner of a mortgaged property receiving assistance under the New Construction or Substantial Rehabilitation Program may not pledge or assign its interest in the applicable HAP Contract as additional security for any loan or obligation, unless HUD approves the terms of any such financing or refinancing. Neither the Housing Act nor the relevant HAP Contracts impose similar requirements for LMSA projects. No representation is made as to whether any owners of any of the Mortgaged Properties have pledged the relevant HAP Contract to any third parties.
Pursuant to HUD regulations and applicable guidelines, certain HAP Contracts entered into by the owners of New Regulation Projects (with certain exceptions as hereinafter described) require the owners to comply with the following additional requirements: (i) to submit to the Contract Administrator within sixty (60) days after the end of each fiscal year of the project, audited financial statements for the project; (ii) to establish with the holder of the project mortgage loan an interest bearing replacement reserve to pay for extraordinary project maintenance needs and the repair and replacement of capital items which is funded with monthly deposits that are subject to adjustment by the AAF (defined below) concurrent with an adjustment in Contract Rent levels, (iii) to limit generally distributions of cash flow of the project remaining after payment of all debt service and other project payables; and (iv) to deposit with the holder of the project mortgage loan or other depository approved by HUD any revenues of the project remaining after payment of the aforesaid distributions into an interest bearing account called the residual receipts account which may be used for a variety of HUD-approved project-related purposes, including debt service.
In general, New Construction and Substantial Rehabilitation HAP Contracts, executed by an owner of an assisted mortgage property pursuant to a notice of selection issued by HUD prior to November 15, 1979 and February 20, 1980, respectively, do not contain any of the aforementioned additional requirements for New Regulation Projects. All New Regulation Projects are generally subject to the audit requirements of the applicable HAP Contracts. All New Regulation Projects (other than those projects with more than 50 units no more than 20% of which receive Section 8 assistance) are also required to establish and maintain a replacement reserve and residual receipt account under the HAP Contract. However, only New Regulation Projects with more than 50 units of which more than 20% receive Section 8 assistance are subject to the aforementioned income distribution restrictions. Mortgaged properties that receive LMSA assistance pursuant to the LMSA HAP Contract form in effect prior to May 1993 are not subject to any of these requirements. LMSA HAP contracts for mortgaged properties in effect after May 1993 require project owners to submit audited project financial statements.
In general, the HAP Contracts provide that a violation or the failure by the project owner to comply with any provision of the HAP Contract or any lease with project residents or the assertion or demonstration by the project owner of an intent not to perform some or all of the owner's obligations under the HAP Contract or any residential lease constitutes a default thereunder. Other specified defaults include the failure by the owner to make a reasonable effort to lease the assisted units in a mortgaged property to Section 8 eligible tenant families and the making of any false statement or misrepresentation to HUD regarding the project mortgage loan or HAP Contract; and the violation by the project owner of
Any applicable HUD regulation or term of any originally FHA held or insured mortgage loan to which the project is subject at the time of the default.
If the project owner fails to cure any default under the HAP Contract, the Contract Administrator or HUD may take any of the following remedial actions against the project owner: (i) to reduce, suspend or terminate HAP payments; (ii) to recover from the owner any excess payments; (iii) to collect all rents and other revenues of the project (including Section 8 assistance payments) and to apply such funds in payment of any or all necessary operating expenses of the project, including debt service; (iv) to take possession of the project or apply to any State or Federal court for the appointment of a receiver for the project; and (v) to apply to any State or Federal court for specific performance of the HAP Contract, injunctive relief against any violation of the HAP Contract as well as any other relief that may be appropriate in a specific case. Other available remedies against project owners in violation of a HAP Contract include (i) the direct payment to the holder of the originally FHA-held or insured mortgage loan on a LMSA project of the Section 8 assistance payments in the event of a default by the mortgagor under the loan, (ii) the suspension, debarment or imposition of other restrictions on participation of the project owner in any future HUD program or project, and (iii) a variety of civil and criminal penalties, including imprisonment. In addition, HUD intends to vigorously pursue available remedies, including abatement of Section 8 subsidies, for owner of HAP Contract requirements, particularly violations relating to the housing quality standards of the program.
Terms of Leases
HUD guidelines prescribe the form of lease to be utilized by project owners for tenant families receiving assistance under the New Construction, Substantial Rehabilitation and LMSA Programs. In general, the initial term of any such lease must be at least one year. In addition, the requisite HUD form of lease currently provides for automatic renewal of the stated term of the lease, unless and until the lease is terminated as a result of a default by the tenant family thereunder. The project owner may terminate the tenancy of assisted tenant families for material non-compliance with the lease, failure on the part of the tenant family to carry out their obligations under any State or local landlord and tenant law, or for other good cause.
Initially, Contract Rents, plus Utility Allowances, may not exceed the HUD determined so-called fair market rents ("Fair Market Rents") for similarly situated units in newly constructed, substantially rehabilitated or existing or moderately rehabilitated developments in the area, although, under special circumstances, HUD can approve initial Contract Rents (plus Utility Allowances) for particular assisted projects in an amount up to 120% of the applicable Fair Market Rents. The Fair Market Rents are published at least annually by HUD in the Federal Register. The Fair Market Rents constitute HUD's determination of the rents including utilities (except telephone), if applicable, ranges and refrigerators, parking and all maintenance, management and other essential housing services which would be required to obtain, in a particular market area, privately developed and owned rental housing of modest design with suitable amenities. In light of the termination of the New Construction and Substantial Rehabilitation Programs, HUD no longer publishes Fair Market Rents for new construction or substantial rehabilitation projects.
The HAP Contracts provide for the payment of Section 8 assistance for assisted units actually occupied by Section 8 eligible low-income families. However, a subsidy equal to 80% of the Contract Rent may be payable for a period of sixty days for all assisted mortgaged properties upon the occurrence of a vacancy in an assisted dwelling unit. HAP Contracts for Section 8 New Construction and Substantial Rehabilitation assistance also provide that vacancy payments may continue for an additional 12-month period in an amount equal to the debt service attributable to the unit, under certain circumstances. If the Contract Administrator determines that the failure by the owner to lease assisted units in a mortgaged property to Section 8 eligible tenant families is not a temporary problem, the HAP Contracts provide that the Contract Administrator may reduce the number of units designated for assistance under the agreement on a temporary or permanent basis. In addition, an owner of an assisted mortgaged property may request certain additional payments of Section 8 assistance as compensation for losses incurred relating to unpaid tenant rents and other charges, property and other unit damages, and other sums due under the applicable lease subsequent to the vacating of an assisted unit by the tenant family.
Adjustments in Contract Rents are available to owners of assisted mortgaged properties on at least an annual basis pursuant to the application of a formula adjustment procedure determined by HUD known as the automatic Annual Adjustment Factor ("AAF") which is published by notice in the Federal Register. The AAF is currently based on a formula using data on residential rent and utilities cost changes for particular market areas from the most recent Bureau of Labor Statistics Consumer Price Index and the HUD Random Digit Dialing rent change surveys. Such adjustments are determined by multiplying the Contract Rent in effect for a particular unit in an assisted mortgaged property on the anniversary date of the HAP Contract by the applicable AAF. All Mortgaged Properties receiving assistance under the New Construction and Substantial Rehabilitation Programs and most Mortgaged Properties receiving assistance under the LMSA Program utilize the AAF method of Contract Rent adjustment.
HUD also has the discretion to approve special adjustments in Contract Rents on a case by case basis for projects subject to the AAF method of Contract Rent adjustment to reflect increases in actual and necessary expenses of owning and maintaining the subsidized units which have resulted from substantial and general increases in such expenses relating to real property taxes, utilities not covered_ by regulated rates, project security or drug-prevention measures, lead-based paint abatement measures, and
Other similar costs to the extent such general increases are not adequately compensated for by the AAF method of Contract Rent adjustment. However, HUD has the right to cancel any such special rent adjustments at any time. Current HUD guidelines provide that HUD may cancel a special rent adjustment at the time of any subsequent request by the project owner for an AAF Contract Rent adjustment.
In addition, HUD has the discretion to authorize increases or decreases in Contract Rents for mortgaged properties receiving assistance under the LMSA Program based on a budgetary review of an individual project's financial needs. Pursuant to this authority, HUD may approve increases in Contract Rents for such projects to compensate the owners thereof for any increases in operating expenses over which the owners have no effective control. HUD intends to convert all such projects to the AAF method of Contract Rent adjustment effective as of the anniversary date of the affected LMSA HAP Contracts following the sale of the Mortgage Loans to the Trust.
The HAP Contracts and applicable HUD guidelines prohibit any adjustment in Contract Rents, which reduces such rents to a level below that in effect as of the effective date of the applicable HAP Contract. In addition, under the Housing Act, HUD is prohibited from requiring any decrease in Contract Rents in effect on or after April 15, 1987 for mortgaged properties receiving assistance under the New Construction and Substantial Rehabilitation Programs except in the context of a refinancing (including a modification) of the project indebtedness which results in a reduction in periodic payments in debt service. This restriction is not applicable to mortgaged properties receiving assistance under the LMSA Program.
In addition, pursuant to the Housing Act, the HAP Contracts and applicable HUD regulations and guidelines require that all adjustments in Contract Rents for assisted mortgaged properties, regardless of the type of Section 8 assistance, be subject to the limitation that in no case shall such adjustments result in material differences in rents charged for comparable assisted and unassisted units in the same market area; except, in the case of mortgaged properties receiving assistance under the New Construction or Substantial Rehabilitation Programs, to the extent any such differences existed at the time of execution of the HAP Contract. The Housing Act also authorizes HUD to promulgate regulations governing the conduct of comparability studies to implement this market comparability standard for assisted mortgaged properties subject to the AAF method of Contract Rent adjustment. Based on current law, the implementation by HUD of this market comparability standard could result in the limitation of any upward adjustments in Contract Rents for New Construction, Substantial Rehabilitation and LMSA projects, as well as decreases in such Contract Rents for LMSA projects. However, to date, HUD has not issued regulations regarding the requisite comparability- standards.
The Department of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act, 1995 (the "1995 HUD Appropriations Act") required HUD to impose rent comparability standards as a limit on AAF adjustments in Contract Rents for certain New Construction and Substantial Rehabilitation projects during fiscal year 1995. HUD was also required to implement these comparability standards for such AAF adjustments conducted in fiscal year 1996, pending enactment by Congress of regular fiscal year 1996 appropriations for HUD. This legislation known as the Department of Veteran Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act, 1996 (the "1996 HUD Appropriations Act") was enacted by Congress on April 26, 1996. However, because the 1996 HUD Appropriations Act does not extend the rent comparability requirements of the 1995 HUD Appropriations Act for AAF Contract Rent Adjustments for New Construction and Substantial Rehabilitation Projects, these requirements will not apply to Contract Rent adjustments for HAP Contract anniversary dates on or after April 26, 1996.
Expiration, Termination and Conversion of Section 8 Assistance
Some forms of HAP Contracts grant the project owner the option to renew the contract for one or more incremental terms, up to the specified maximum term. For New Construction or Substantial Rehabilitation projects other than New Regulation projects, which are subject to a single term, the renewal is at the sole option of the owner. For LMSA projects, the renewal of any such incremental term requires the agreement of both the owner and HUD. If the HAP Contract is renewed, the provisions of the agreement will remain in effect during the additional incremental term. During the additional term, HUD is obligated to make assistance payments to the owner in accordance with the HAP Contract, which payments will include any adjustments of the Contract Rents provided thereunder.
If a HAP Contract expires, neither HUD nor the project owner has any contractual obligation to renew the agreement or to enter into a new HAP Contract for the previously assisted units. If HUD elects to provide additional assistance upon expiration of a HAP Contract, HUD may provide such assistance pursuant to a new HAP Contract for project-based assistance or for Section 8 vouchers or certificates as hereinafter described. Prior to enactment in 1996 of the Balanced Budget Down-payment Act, I (the "BBDA."), the Housing Act required HUD, upon request of the project owner, to extend any expiring LMSA HAP Contract or to enter into a new LMSA HAP Contract with the owner. This requirement was repealed by the BBDA.
The BBDA imposes certain new requirements concerning renewals of expiring HAP Contracts. The BBDA requires HUD, at the request of the project owner, to renew, for a period of one year, any project-based HAP Contract that expires or terminates during fiscal year 1996 at the Contract Rent levels in effect at the time of expiration or termination of the agreement. However, HUD's discretion to renew such HAP Contracts is subject to the availability of sufficient funds appropriated by Congress for such purposes.