Eliminate barriers in the project-based Section 8 contract renewal process to promote preservation of expriing use projects.

Section 8 Renewal Policies Creating Underwriting Concerns for Preservation Projects

When an owner seeks to transfer a project rather than opt out of the Section 8 program, the buyer needs to secure financing in order to purchase the property.  Typically, new owners also take this opportunity to rehabilitate the real estate.  In the Section 8 Contract Renewal Policy Guide Book, HUD implemented a number of “policies” which do not appear to be based in regulation and create conflicts with available preservation project funding sources such as the LIHTC program.  Some of these policies which create barriers are identified below.  Administrative changes to these policies would help promote the recapitalization and renovation of preservation properties thereby allowing for long term subsidies to be preserved. 

Section 8 Policy Barriers to Preservation:

1.      Limiting HUD-recognized debt service on budget-based rent determinations to the original debt service amount at the time of the initial contract renewal;

2.      The inability of owners to secure long-term Section 8 contract extensions on mid-term new regulation Section 8 contracts and post-MAHRA Section 8 contracts to match project financing terms at the time of transfer. 

3.      The use of “as-is” market value in Rent Comparability Studies (RCS) and appraisals on project transfers;

4.      HUD and Section 8 Contract Administrator’s unwillingness to include an industry standard debt service coverage ratio (DSCR) when calculating budget-based Section 8 contract rents at the time of renewal and project refinancing;

5.      The prohibition against including required fees such as tax credit monitoring and asset management fees in the contract rent determination;

6.      Disallowing a return on equity for non-profit owners;

7.      Refusal to provide an adjustment on the return on equity calculation when new equity is brought in to a project;

8.      The prohibition against the use of Residual Receipts for the acquisition and renovation of Preservation projects by qualified Preservation purchasers willing to enter into extended use agreements.