**U.S. Department of Housing and Urban Development**

> **HOUSING**

**Special Attention of: Notice** H 99-15

All Secretary\'s Representatives Issued: 6/16/99

All Senior Community Builders Expires: 6/30/2000

All Multifamily Hub Directors

Public Housing Hub Office Directors

All Multifamily Program Center Directors Cross References:

All Multifamily Project Managers Notice H 98-34

All PIH Program Center Coordinators Notice H 99-08

Contract Administrators, Owners and Managers

of Projects eligible for prepayment

**Subject:** Emergency Initiative to Preserve Below-Market Project-Based
Section 8 Multifamily Housing Stock

I. INTRODUCTION 2

II\. DEFINITIONS 3

III\. ELIGIBILITY 6

IV\. CRITERIA FOR PARTICIPATION 8

V. OPT-OUT NOTICE 9

VI\. SHORT TERM RENEWALS 11

VII\. HUD NOTICE H 98-34 AND H 99-08 11

VIII\. COMPARABILITY STUDIES 12

IX\. RENTS AND OWNER DISTRIBUTIONS 14

X. REQUIREMENTS 18

XI\. WAIVERS OF THE ORIGINIAL LIMITED DIVIDEND

LIMITATION 19

XII\. TRACKING 19

XIII\. CONTRACT ADMINISTRATORS 20

XIV\. SECTION 515 PROPERTIES 20

XV\. FURTHER INFORMATION 21

Attachments:

Contract Addendum Attachment 1

Eligibility Worksheets Attachment 2

Tenant Notification Letters Attachment 3

Owner\'s Checklist Attachment 4

Questions and Answers Attachment 5

H: Distribution : W-3-1

**I. [INTRODUCTION]{.underline}**

> Twenty-five years ago, the Federal Government created the Section 8
> Housing Assistance Payments Program. The program now faces a major
> challenge: it risks losing some of the best of its housing through
> owner opt-outs of project-based Section 8 Contracts with below-market
> rents. When Section 8 rents are below market, owners may find it
> financially attractive to opt out of the Program and convert their
> properties to market rate operations. HUD developed this Emergency
> Initiative to mark the Section 8 rents of certain properties up to
> market in order to limit the incentive to opt out and preserve vital
> affordable housing stock.
>
> The cost of marking all below-market Section 8 properties up to market
> would be prohibitive and unnecessary. HUD research shows that the
> owners of assisted properties in high-rent areas are most likely to
> opt out of the Section 8 program. Therefore, the Department has
> targeted a limited universe of affordable housing stock in high-rent
> areas for the Emergency Initiative. HUD defines high-rent areas as
> those where comparable market rents are at or above 110% of the Fair
> Market Rent (FMR). However because of the cost, this Emergency
> Initiative will limit rent increases to a maximum of comparable market
> rents or 150% of the published EMRS, whichever is lower.
>
> HUD Notice H 98-34, \"Project-based Section 8 Contracts Expiring in
> Fiscal Year 1999,\" stated that contract renewals are authorized under
> two provisions of the Multifamily Assisted Housing Reform and
> Affordability Act of 1997 (hereafter referred to as \"MAHRA\" or \"the
> Act\"), Section 524(a)(1) and Section 524(a)(2). Section 524(a)(1) of
> MAHRA allows for the renewal of expiring Section 8 contracts at levels
> that do not exceed comparable market rents for the local area. Under
> Notice H 98-34, owners requesting contract renewals under the
> 524(a)(1) provisions must submit a rent comparability study and, if
> current rents are at or below comparable market rents, the contract
> will be renewed at the current rent level. If the owner believes that
> a rent increase is needed to support project operations, the owner can
> submit a budget-based rent increase request at the time of renewal.
> Projects with rents above the comparable market rents are generally
> referred to the Office of Multifamily Housing Assistance Restructuring
> (OMHAR). Owners requesting contract renewals under Section 524(a)(2)
> will receive initial renewal rents at the lesser of current rent
> levels adjusted by an Operating Cost Adjustment Factor (OCAF) or the

2

> budget-based rent level. Rents for projects in categories 524(a)(2)(A)
> through (D) are not capped at the market rent levels. Projects
> eligible for renewal under 524(a)(2) also have the option of renewing
> under 524(a)(1) (please refer to HUD Notice H 98-34 for further
> details).
>
> Unlike the specific statutory language for establishing renewal rents
> under 524(a)(2), statutory guidance for setting renewal rents under
> the 524(a)(1) provision is limited. The MAHRA legislation simply
> states that renewals shall not exceed comparable market rents. While
> Section 524(a)(1) does not prohibit HUD from allowing rents to be
> marked up to market, the Department must work within its budgetary
> constraints. Therefore, the Emergency Initiative must preserve
> below-market project-based Section 8 housing stock at a reasonable
> cost to the Federal government. This Notice provides guidance on what
> the Department has determined is the most effective means to allocate
> limited housing assistance resources by targeting those properties
> most likely to opt out and by setting a reasonable cap on the rents
> that will be paid.
>
> As a result of the Emergency Initiative, changes have been made to
> attachment 4 of HUD Notice H 98-34 and HUD Notice H 99-08. A new
> Option 4 and worksheet has been added to the Owner\'s Checklist.

**II. [DEFINITIONS]{.underline}**

> [Annual Interest Subsidy:]{.underline} For Section 236 properties, the
> Annual Interest Subsidy equals the current Annual Interest Reduction
> Payment Amount, as defined in 24 CFR 236.520. For other properties,
> the Annual Interest Subsidy equals the unpaid principal balance of the
> subsidized loan multiplied by the difference between the annual
> original interest rate (7% if original market note rate is not
> available) and the annual subsidized interest rate (1% for Section
> 515, 3% for Section 221(d)(3) BMIR).
>
> [Annual Eligible Interest Subsidy:]{.underline} The Annual Interest
> Subsidy multiplied by the percentage of the total units in the
> property that are in the Section 8 contract(s) eligible under this
> Initiative.
>
> [Capped Comparable Gross]{.underline} Rents: If the Final Comparable
> Gross Rent Potential is less than 150% of the FMR Potential, then the
> Capped Comparable Gross Rents are the Final

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> Comparable Gross Rents. If the Final Comparable Gross Rent Potential
> is not less than 150% of the FMR Potential, then the Capped Comparable
> Gross Rents are 150% of the FMRS.
>
> [Capped Comparable Gross Rent Potential:]{.underline} The lesser of
> the Final Comparable Gross Rent Potential or 150% of the EMR
> Potential.
>
> [Current Section 8 Rents]{.underline}: The rents specified by the
> Section 8 contracts) eligible under this Initiative.
>
> [Current Section 8 Rent Potential:]{.underline} The sum of all Current
> Section 8 Rents for the units in the Section 8 contracts) eligible
> under this Initiative.
>
> [Current Section 8 Gross Rents:]{.underline} The Current Section 8
> Rents plus the applicable Utility Allowances, if any.
>
> [Current Section 8 Gross Rent Potential:]{.underline} The sum of all
> Current Section 8 Gross Rents under the Section 8 contracts) eligible
> under this Initiative.
>
> [Fair Market Rent (FMR]{.underline}): The rent, including the cost of
> utilities (except telephone), that would be required to be paid in the
> housing market area to obtain privately owned, existing, decent, safe
> and sanitary rental housing of modest (non-luxury) nature with
> suitable amenities. Fair market rents for existing housing are
> established by HUD for housing units of varying sizes (number of
> bedrooms), and are published in the Federal Register in accordance
> with 24 CFR part 888.
>
> [Final Comparable Market Rents:]{.underline} The rents that will be
> used by HUD as the comparable market rents for determining rent
> increases under this Initiative. The Final Comparable Market Rents
> will be set based on the comparison of the Owner Comparable Market
> Rents and the HUD Comparable Market Rents described in Section VIII B
> of this Notice.
>
> [Final Comparable Rent Potential:]{.underline} The sum of all Final
> Comparable Market Rents for units in the Section 8 contracts) eligible
> under this Initiative.
>
> [Final Comparable Gross Rents:]{.underline} The Final Comparable
> Market Rents plus the applicable Utility Allowances, if any.

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> [Final Comparable Gross Rent Potential:]{.underline} The sum of all
> Final Comparable Gross Rents for units in the Section 8 contracts
> eligible under this Initiative.
>
> [FMR Potential:]{.underline} The sum of FMRs for all units in the
> Section 8 contracts eligible under this Initiative.
>
> [HUD Comparable Market Rents:]{.underline} The rents specified by the
> comparability study performed by the HUD appraiser under this
> Initiative.
>
> [HUD Comparable Rent Potential:]{.underline} The sum of all HUD
> Comparable Market Rents for the units in the Section 8 contracts
> eligible under this Initiative.
>
> [HUD Comparable Gross Rents:]{.underline} The HUD Comparable Market
> Rents plus the applicable Utility Allowances, if any.
>
> [HUD Comparable Gross Rent Potential:]{.underline} The sum of all HUD
> Comparable Gross Rents for the units in the Section 8 contracts
> eligible under this Initiative.
>
> [HUD Section 236 Fair Market Rental Charge:]{.underline} The rental
> charge in a Section 236 project based upon operating it with payments
> to principal and interest under the actual mortgage interest rate, and
> also including payment of the mortgage insurance premium.
>
> [Interest Subsidy Adjustment Factor:]{.underline} The Interest Subsidy
> Adjustment Factor is the annual Capped Comparable Gross Rent Potential
> minus the Annual Eligible Interest Subsidy, all divided by the annual
> Capped Comparable Gross Rent Potential.
>
> [New Authorized Rents:]{.underline} For Section 23.6, Section
> 221(d)(3) BMIR and Section 515 properties, the rents calculated by
> following the existing guidance under Handbook 4350.1 Chapter 7 using
> a budget submitted by the owner, if any.
>
> [New Authorized Rent Potential:]{.underline} The sum of all New
> Authorized Rents for the units in the Section 8 contracts eligible
> under this Initiative.
>
> [New Authorized Gross Rents:]{.underline} The New Authorized Rents
> plus the applicable Utility Allowances, if any.
>
> [New Authorized Gross Rent Potential:]{.underline} The sum of all New
> Authorized Gross Rents for the units in the Section 8 contracts
> eligible under this Initiative.

5

[New Section 8 Rents:]{.underline} The New Section 8 Gross Rents minus
the applicable Utility Allowances, if any.

> [New Section 8 Rent Potential:]{.underline} The sum of all New Section
> 8 Rents for the units in the Section 8 contracts eligible under this
> Initiative.
>
> [New Section 8 Gross Rents:]{.underline} The new gross rents for the
> Section 8 contracts eligible under this Notice. The new Section 8
> Gross Rents will be set based on the process described in Section IX
> A. of this Notice.
>
> [New Section 8 Gross Rent Potential:]{.underline} The sum of all New
> Section 8 Gross Rents for the units in the Section 8
> contract(s)eligible under this Initiative.
>
> [Owner Comparable Market Rents:]{.underline} The rents specified by
> the comparability study submitted by the owner under this Initiative.
>
> [Owner Comparable Rent Potential:]{.underline} The sum of all Owner
> Comparable Market Rents for the units in the Section 8 contracts
> eligible under this Initiative.
>
> [Owner Comparable Gross Rents:]{.underline} The Owner Comparable
> Market Rents plus the applicable Utility Allowances, if any.
>
> [Owner Comparable Gross Rent Potential:]{.underline} The sum of all
> Owner Comparable Gross Rents for units under the expiring Section 8
> contracts eligible under this Initiative.

**III.** **[ELIGIBILITY]{.underline}**

> In general, properties with Section 8 contracts are eligible for
> consideration in the Emergency Initiative. If a contract has already
> been renewed for one year in Fiscal Year 1999, or if a multi-year
> contract is still in effect, the owner must wait until expiration of
> the contract for the contract to be eligible under this Initiative.
> For properties with multiple expiring contracts or contract stages,
> those contracts or stages that expire in the same fiscal year can be
> combined and processed together under the Emergency Initiative.
>
> Participation is ***[denied]{.underline}*,** however, if a property
> has any one of the following characteristics:

6

o The property has a low and moderate income use restriction that cannot
be eliminated by unilateral action by the owner after the expiration
date of the Section 8 contracts) eligible under this notice. (Examples
would be the existence of a Rent Supplement Contract, prior or present
flexible subsidy assistance, 236 or 221(d)(3)BMIR mortgage with a
prepayment restriction, a preservation project with a recorded use
agreement, Low-Income Housing Tax Credits (aka LIHTCs) under Section 42
of the Internal Revenue Code, certain Section 515 loans, 202 properties,
etc.)

o The owner is subject to administrative sanctions (i.e., debarment,
suspension, unresolved adverse audit findings or has failed to correct
material violations of HUD rules).

o The project has a Section 8 Mod Rehab HAP contract expiring in fiscal
year 1999 (other than those assisted under Section 441 of the Stewart B.
McKinney Homeless Assistance Act).

o The property has a REAC inspection score of less than 60 or
uncorrected, exigent health and safety violations.

***[Note]{.underline}*:** If the property has not had a REAC inspection,
the local Hub or Program Center will:

o Rely on current information available to make an initial evaluation;

o Contact Headquarters, Office of Portfolio Management, to order an \"on
demand\" REAC inspection; and

o Not approve a project for the benefits of the Emergency Initiative
until there is a completed REAC inspection with a score of 60 or above.

o The mortgagor is a not-for-profit entity.

o The project does not have a contract that is expiring.

o The owner previously provided notice of an opt-out and the local
housing authority has issued vouchers to one or more of the tenants.

7

**IV. [CRITERIA FOR PARTICIPATION]{.underline}**

> A. Owners must follow the guidelines provided in Notice H 98-34 and H
> 99-08 for \"Contracts Renewed Pursuant to 524(a)(1),\" and must submit
> to the Hub or Program Center a comparability study, a request for
> contract renewal and a request to be considered for participation in
> the \"Emergency Initiative.\"
>
> ***[Note]{.underline}*:** Section V below contains an exception for
> owners who have submitted an election to opt out of their Section 8
> Contract(s) prior to the date of this Notice. They may submit a
> comparability study that does not strictly conform with the
> comparability study required by the above Notices.
>
> B. A property will be considered for a Section 8 rent increase under
> this Notice if:
>
> 1\. The owner Comparable Gross Rent Potential is at or above 110% of
> the FMR Potential; and
>
> 2\. The property does not fit into any of the ineligible categories
> listed in Section III above.
>
> \"Fair Market Rents for the Section 8 Housing Assistance Payments
> Program\" are published annually in the [Federal
> Register]{.underline}. Offices can also access the information via
> HUD\'s Policy Development and Research (PD&R) web page at
>
> http://www.huduser.org/datasets/fmr.html.
>
> Use the FMR figures calculated for the fiscal year in which the
> contract is expiring to establish eligibility for this Initiative. For
> fiscal year 1999, use the EMR figures published in the [Federal
> Register]{.underline} on [October 1, 1998]{.underline}. Project
> Managers (PMs) can use the Real Estate Management System (REMS) to
> establish initial eligibility. Worksheets similar to those in
> Attachment 2 will be available to HUD Staff in REMS. The worksheets in
> Attachment 2 will be available on the internet for owners and Contract
> Administrators.
>
> C. If the property meets the initial eligibility criteria in
> paragraphs A and B above, the PM:

8

1\. Orders a comparability study from the Department\'s independent
third-party contractor to determine ultimate eligibility in the
Emergency Initiative, and

2\. Grants, if needed, a three month short-term renewal to the owner at
current rents to afford the owner and HUD time to complete the
eligibility analyses.

D. If the property does not meet the initial eligibility criteria that
the Owner Comparable Gross Rent Potential is at or above 110% of the FMR
Potential, waivers of this requirement may only be considered subject to
the limited circumstances described below and available funding. Such
waivers may only be issued by the Assistant Secretary for Housing
following a written recommendation from the applicable Hub Director that
includes at least two reasons, along with supporting evidence, that the
property is a critical affordable housing resource. Examples of such
reasons include:

> 1\. Vouchers would be difficult to use in the local area, demonstrated
> by a low vacancy rate for affordable housing, a high turnback rate for
> vouchers or a lack of comparable rental housing.
>
> 2\. The residents of the property are a particularly vulnerable
> population, demonstrated by a high percentage of the units being
> rented to elderly, disabled, or large families.
>
> 3\. The property is a high priority for the local community,
> demonstrated by a contribution of state or local funds to the
> property.
>
> Upon submission of the written recommendation by the Hub Director, the
> PM may offer a short-term renewal as described in Section VI below.

**V. [OPT-OUT NOTICE]{.underline}**

A. If, on or before the date of this Notice, an owner of a project with
a potentially eligible Section 8 contract submitted \"Worksheet for
Option 3 - Opting-out of the Section 8 Contract,\" or if the contract
had expired and a short-term renewal had been given to

9

> comply with the 1-year Notice requirement to tenants or to provide
> sufficient time to process vouchers:

1\. The PM:

> a\. Contacts the owner to inform him/her of the Department\'s
> Initiative to preserve affordable housing stock;
>
> b\. Invites the owner to reconsider his/her decision to opt out in
> light of the implementation of this Initiative and to submit
> Attachment 4 and a comparability study to be considered for
> participation; and
>
> c\. Offers the owner a short-term contract under Section 524(a)(1) as
> described in Section VI below at existing rents, if needed, to afford
> the owner and HUD time to complete the eligibility analyses.

2\. For initial eligibility, in these cases, the owner does not have to
strictly comply with the guidelines in H 98-34 and H 99-08 with respect
to comparability studies.

> a\. If the owner can submit reasonable evidence (as determined by the
> local HUD office) that the comparable gross rent potential is at or
> above 110% of the FMR Potential, s/he will be considered for
> participation in this Initiative.
>
> Reasonable evidence could be as simple as a recent rental survey
> conducted by an individual who is knowledgeable of the market area. At
> a minimum, the information submitted must be presented on the forms in
> Notice H 98-34.
>
> b\. In this case only, the owner has the option of not submitting a
> comparability study in strict compliance with H 98-34. If the owner
> submits a comparability study the Final Comparable Market Rents will
> be determined as described in Section VIII below. If the owner does
> not

10

submit a comparability study, the Final Comparable Market Rents will be
determined by HUD\'s comparability study.

> B. The Emergency Initiative is not available for properties that are
> opting out and the residents have already received their vouchers.
> This criterion for eligibility applies whether the Section 8 contract
> has expired or not.

**VI.** **[SHORT TERM RENEWALS]{.underline}**

When an owner meets the initial eligibility requirements for
participation in this Initiative the PM should, if necessary, grant a
three-month short-term renewal contract, to allow the owner and HUD
sufficient processing time.

> A. Use the 524(a)(1) contract at current rents. The authority under
> 524(a)(1) allows the short-term renewal to be at current rents as long
> as the owner submits a comparability study and the rents do not exceed
> market.
>
> B. If the short term renewal would terminate in either October or
> November, extend the contract term to December to avoid the problems
> associated with the beginning of a new fiscal year.
>
> C. Any short term renewal may be terminated early if the owner and HUD
> reach consensus on the new market rents.

**VII.** **[HUD NOTICE H 98-34 AND H 99-08]{.underline}**

Owners of projects where the Comparable Gross Rent Potential is below
110% of the FMR Potential are not eligible for this Initiative and shall
continue to follow the guidance provided in H 98-34 and H 99-08.
However, these projects may receive a budget-based rent increase if:

> A. The owner\'s request can demonstrate that a rent increase is needed
> to support project operations;
>
> B. HUD can justify and approve the budgeted rent increase; and

11

C. In no event would the increased rents exceed comparable market rents
for the area.

**VIII. [COMPARABILITY STUDIES]{.underline}**

> A. HUD\'s comparability study:
>
> The Department must take a proactive role in accurately determining
> eligibility and rent levels under this Initiative. Therefore, the
> Department is implementing the following process to establish accurate
> comparable market rents for the Initiative:
>
> 1\. The owner submits a comparability study following Departmental
> guidelines established in H 98-34 and H 99-08.
>
> 2\. The PM uses the owner\'s study as an initial determining factor
> for participation.
>
> a\. If the Owner Comparable Gross Rent Potential is below 110% of the
> FMR Potential, the owner is not eligible for the Initiative. Waivers
> of this requirement may be considered in limited circumstances as
> described in Section IV-D.
>
> b\. If the Owner Comparable Gross Rent Potential is at or above 110%
> of the FMR Potential, the PM immediately orders a HUD comparability
> study.
>
> o HUD will hire an independent third-party appraiser through its
> Contracting Officer.
>
> o The PM will rely, without an in-depth review, upon the information
> contained in the third-party appraisal in implementing the Emergency
> Initiative.
>
> o Headquarters will provide detailed information on contracting
> procedures for this Initiative to Field Offices in a separate
> memorandum.
>
> B. Differences in Comparability Studies:

12

1\. When the HUD Comparable Gross Rent Potential is below 110% of the
FMR Potential the owner is not eligible to participate in the Emergency
Initiative. Waivers of this requirement may be considered in limited
circumstances as described in Section IV-D.

> 2\. When the HUD Comparable Gross Rent Potential is above the Owner
> Comparable Gross Rent Potential, the Final Comparable Market Rents
> will be the Owner Comparable Market Rents.
>
> 3\. When the HUD Comparable Gross Rent Potential is below the Owner
> Comparable Gross Rent Potential, but at or above 110% of the FMR
> Potential, if the Owner Comparable Rent Potential is:
>
> a\. less than 105% of the HUD Comparable Rent Potential, the Final
> Comparable Market Rents will be the Owner Comparable Market Rents; or
>
> b\. greater than or equal to 105% of the HUD Comparable Rent
> Potential, the Final Comparable Market Rents will be 105% of the HUD
> Comparable Market Rents.
>
> 4\. This Notice does not allow for any negotiations nor is there an
> appeal process. If the owner does not accept the conclusions of the
> process described above, the owner must pursue the other options
> identified in H 98-34.

***[Note:]{.underline}***

> FMRs are housing market-wide estimates of rent plus the cost of
> utilities (excluding telephone). -Therefore, where contracts have
> separately calculated Utility Allowances, add the Utility Allowance
> amount to the Comparable Market Rents to reach the Comparable Gross
> Rents to compare them to the FMRs. The PM should make sure that the
> Comparable Market Rents arrived at in the comparability studies use
> the same assumptions about payment of utilities as the Section 8
> Contract Rents.
>
> Use REMS for:

13

1\. Comparing the Owner and HUD comparability studies

> 2\. Determining the Final Comparable Market Rents .and
>
> 3\. Determining final eligibility.

**IX. [RENTS AND OWNER DISTRIBUTIONS]{.underline}**

> A. [Section 8 Rents]{.underline}
>
> Under this Initiative, the comparable market rents are capped at 150%
> of the FMR to limit rent increases to a reasonable level. Waivers of
> this requirement may be considered in limited circumstances as
> described in Section IV-D.
>
> 1\. Sections 236, 221(d)(3)BMIR and 515 properties.
>
> For properties with subsidized FHA loans, the comparable market rents
> are reduced to take account of the benefits the property is already
> receiving from the below-market interest rate mortgage by using an
> Interest Subsidy Adjustment Factor. To ensure that this Adjustment
> Factor is applied consistently between properties with subsidized FHA
> loans and those without these loans, the 150% of FMR cap on comparable
> rents is calculated ***before*** applying the Interest Subsidy
> Adjustment Factor.
>
> If the Final Comparable Gross Rent Potential is:
>
> a\. Greater than 150% of the FMR Potential, set the New Section 8
> Gross Rents at 150% of FMRs multiplied by the Interest Subsidy
> Adjustment Factor; or
>
> b\. Equal to or less than 150% of the FMR Potential, set the New
> Section 8 Gross Rents at the Final Comparable Gross Rents multiplied
> by the Interest Subsidy Adjustment Factor.

***[Notes:]{.underline}***

14

o It is possible that using the Interest Subsidy Adjustment Factor would
cut the rents below the level they would have been under a traditional
budget-based renewal. In no case will Section 8 rents be lower as a
result of this Initiative than they would have been under existing
guidance. If the New Section 8 Gross Rents as calculated above are less
than the New Authorized Gross Rents, then set the New Section 8 Gross
Rents at the New Authorized Gross Rents.

> 2\. Other New Construction/Sub Rehab Properties.
>
> If the Final Comparable Gross Rent Potential is:
>
> a\. Greater than 150% of the FMR Potential, set the New Section 8
> Gross Rents at 150% of FMRs
>
> b\. Equal to or less than 150% of the FMR Potential, set the New
> Section 8 Gross Rents at the Final Comparable Gross Rents.
>
> Use the worksheets provided in Attachment 2 to this Notice to perform
> all the calculations.

B. [Owner Distributions]{.underline}

Due to the restrictions on distributions to owners of Limited
Distribution properties, the Department is issuing a limited Waiver
allowing owners of properties renewed under this Initiative an increased
distribution as described below. This increased distribution applies
only to units in Section 8 contracts eligible under this Notice.

> 1\. Section 236, 221(d)(3)BMIR and 515 properties
>
> Follow the existing guidance under Handbook 4350.1 Chapter 7 to
> calculate the New Authorized Rents based on a budget submitted by the
> owner. If there is no budget submitted, the New Authorized Rents will
> be the current rents.
>
> The maximum annual amount of the increased distribution may be equal
> to the difference between the annual New Authorized Rent Potential
> -and the annual New Section 8 Rent Potential.

15

2\. Other New Construction/Sub Rehab Properties

> The maximum annual amount of the increased ,distribution may be equal
> to the difference between the annual Current Section 8 Rent Potential
> and the annual New Section 8 Rent Potential.
>
> Use REMS to perform all the calculations.
>
> In both cases, add the increased distribution to the current limited
> distribution (6% or 10% of initial equity) to reach the total
> distribution.
>
> Distributions are payable only out of surplus cash existing at the end
> of the project\'s semi-annual or annual fiscal period, whichever is
> allowed in the applicable Regulations and Handbook 4370.2.
> Distributions earned but unpaid in one period may be carried forward
> in accordance with instructions in the Handbook.
>
> ***[Note]{.underline}:*** The increase in Section 236 Basic Rents as a
> result of owner participation in the Emergency Initiative will not
> affect residents living in Section 236 projects that receive Section 8
> rental voucher or certificate assistance.

C. [Non-Section 8 Rents]{.underline}

> 1\. For Section 236 properties, the increased distribution under this
> Initiative will be added as an additional expense to the New
> Authorized Rents to reach the New Section 8 Rents, which will also be
> the new Section 236 Basic Rents for the Section 8 units under
> contracts eligible for this Initiative. This increase, however, will
> only affect the Section 236 Basic and Market Rents for the Section 8
> units under contracts eligible for this Initiative. To protect
> non-Section 8 residents from the hardship of increased rents, the
> Basic and Market rents for the non-Section 8 units (and for Section 8
> units under contracts that are not currently expiring) will not be
> increased as a result of the increased distribution. Instead, they
> will be set at the New Authorized Rents.

***[Note:]{.underline}***

16

> o Overall, in a Section 236 project, whether partially or fully
> assisted with Section 8:

· The Basic Rental Charges for all units must in the aggregate be the
amount needed to operate the project with the payments of principal and
interest due under a mortgage bearing interest at the rate of 1% per
annum.

· The HUD Section 236 Market Rental Charge for all units must be in the
aggregate the amount needed to operate the project with payments of
principal and interest under the project\'s actual mortgage and also the
mortgage insurance premium.

> The rental requirements set forth above are statutory requirements of
> Section 236(f)(1) of the National Housing Act (NHA).

o A Section 8 unit in a Section 236 project covered by this Emergency
Initiative can have a different Basic Rent from a non-Section 8 unit (or
a Section 8 unit not eligible for or approved for this Initiative), even
though, generally, the units may be identical. Similarly, a Section 8
unit covered by this Initiative can have a different HUD Section 236
Fair Market Rental Charge from a generally identical non-Section 8 unit
(or a Section 8 unit not eligible for or approved for this Initiative).
The Department has the responsibility under Section 236(f)(1) of the NHA
to establish a Basic Rent and a HUD Section 236 Fair Market Rental
Charge for every unit. The differential in Basic Rents described above
for generally identical units, and similarly in HUD Section 236 Fair
Market Rental Charges, is linked to:

. The Department\'s effort to raise the rent of Section 8 units to
prevent Section 8 opt-outs, to avoid Section 236 prepayments, and to
preserve low-income housing; and

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o The Department\'s policy not to adversely affect the rent levels of
non-Section 8 tenants, since Section 8 is not available to cover any
increase in rent for them.

> 2\. Section 221(d)(3)BMIR and Section 515 properties
>
> To protect non-Section 8 residents from the hardship of increased
> rents, the rents for the non-Section 8 units (and for Section 8 units
> not eligible for or approved for this Initiative) will not be
> increased as a result of the increased distribution. Instead, they
> will be set at the New Authorized Rents.
>
> 3\. Other New Construction/Sub Rehab Properties
>
> This Initiative should have no effect on the non-Section 8 units or
> units under contracts that are not currently expiring.

**X.** **[REQUIREMENTS]{.underline}**

Conditional Five Year Renewals

Although HUD has the authority to enter into contracts of any length,
HUD has generally entered into one-year renewal contracts because
Congress has appropriated funds for renewals on an annual basis. Section
549(b)of the Departments of Veterans Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act, 1999, provides
that if an owner agrees to a five-year contract renewal, the tenant
notification period relating to the expiration of the contract shall be
reduced from an annual requirement to a single notification six months
before the end of the five-year period. The contract would be subject to
the availability of appropriations.

Upon signing a five-year contract renewal, owners must notify tenants in
writing that they have agreed to a five-year contract renewal agreement
with the Department. This letter must also state that the contract is
subject to the availability of adequate annual appropriations. The
letter shall advise that the tenants will receive not less than a
six-month written notification before the expiration of the five-year
contract. See attachment 3 for five-year renewal sample tenant
notification letters.

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The provisions described above give HUD the authority to condition any
rent increase up to market under the Emergency Initiative on the
owner\'s willingness to execute a conditional five-year contract.
Therefore, for an owner of an eligible property to receive a rent
increase up to comparable market rent levels under Section 524(a)(1),
HUD is requiring the owner to execute a contract which has a one-year
initial term and which provides that the contract will automatically
renew for four additional one-year terms (subject to the availability of
adequate appropriations at the time of annual renewals).

> Additional guidance on conditional five-year renewals will be
> forthcoming. For now, Field Offices should use the special contracts
> attached to this memorandum (Attachments 1 and 1A).

**XI.** **[WAIVERS OF THE ORIGINAL DIVIDEND LIMITATION]{.underline}**

> The waiver will apply to all project owners, who are subject to a
> limited dividend limitation, and are approved for, and meet the
> requirements of, the Emergency Initiative. The purpose of the waiver
> is to increase the permissible distribution of limited dividend owners
> through increased rents and Section 8 assistance, thereby encouraging
> such owners not to opt out of their Section 8 contracts and prepay
> their subsidized FHA-insured mortgages, if any. The waiver is a
> one-time waiver provided for a fixed universe of projects and is
> designed to further preservation of the low-income housing stock.
> Field Office staff will not have to prepare the waiver. The Office of
> General Counsel in Headquarters is preparing the waiver.
>
> The waiver itself is only applicable for the period of time when the
> benefits of the Emergency Initiative are extended to the owner, i.e.,
> from the date of execution of the Section 8 Renewal Contract, until
> the termination of the Section 8 assistance provided for under the
> Initiative. The actual amount of the increased distribution permitted
> by this waiver, is determined under Section IX of this Notice,
> entitled Rents and Owner Distributions.
>
> The limited waiver will apply to regulatory provisions at 24 CFR
> 221.532(a) (1995) and 236.50(a)(2) (1995), which limit the
> mortgagor\'s distribution to 6 percent annually of his initial equity
> investment in the project, as well as 24 CFR 880.205(b), 881.205(b),
> and 883.306(b),

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which limit the mortgagor\'s permissible takeout for elderly projects to
6 percent, and for non-elderly projects to 10 percent.

**XII.** **[TRACKING]{.underline}**

REMS Instructions:

> Enter eligibility data in REMS when a project applies for the
> Emergency Initiative. Initially, enter data on the contract\'s Current
> Section 8 Rent Potential and Owner Comparable Rent Potential, in
> addition to the choice of renewal option and any related short-term
> renewals granted. When the HUD Comparable Rent Potential is available
> from the HUD ordered comparability study, update REMS to reflect this
> estimate.
>
> Remember, if the Section 8 Rents and the Comparable Market Rents
> exclude the cost of utilities, adjust the Section 8 Rents and the
> Market Rents upward **by** the amount of the relevant Utility
> Allowances to compare them with FMRS, which are Gross Rents.
>
> When a final decision is reached on the New Section 8 Rents pursuant
> to the calculations as described in REMS and in Attachment 2, enter
> the New Section 8 Rent Potential in REMS, and the decision date.

**XIII.** **[CONTRACT ADMINISTRATORS]{.underline}**

> Contract Administrators will perform all the PM duties discussed above
> except that they will contact their local Hub or Processing Center
> when they need a comparability study or on demand REAC inspection.
> Contract Administrators can download the Eligibility Worksheets from
> the HUD Homepage at http:-//www.hud.gov/fha/mfh/mfhsec8.html, where
> they will be available both in PDF format and in the form of Excel
> spreadsheets.

**XIV.** **[515 PROPERTIES]{.underline}**

For owners of 515 properties to participate in this Initiative, they
must submit a letter from the Rural Housing Agency indicating the
property is not restricted to low and moderate income use except by the
expiring Section 8 contract.

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**XV.** **[FURTHER INFORMATION]{.underline}**

Project owners, managers, contract administrators, tenants and other
interested parties who have questions regarding this Notice should
contact the Project Manager at the Multifamily Program Center or the Hub
that has jurisdiction over their project(s). Notices, Regulations,
Handbooks and other Departmental publications can be accessed via the
web at www.hudclips.org. Other useful sites are:

Multifamily Business Page:

www.hud.gov/fha/mfh/fhamfbus.html

Section 8 Mailbox: sec_8_expiring_contracts@hud.gov

Frequently Asked Questions:

www.hud.gov/fha/mfh/mfhfaqs8.html

PD& R Home Page:

www.hud.gov/pdr.html (for FMRs click on \"\"huduser\" then on \'data
sets\")

William C. Apgar

> Assistant Secretary for Housing-
>
> Federal Housing Commissioner

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