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PART I

INTRODUCTION

CHAPTER 1. INTRODUCTION

1-1 LEGAL AUTHORITY FOR THE RENTAL REHABILITATION PROGRAM.

the Rental Rehabilitation Program (RRP) was authorized by

Congress as part of Section 17 of the United States

Housing Act of 1937 which was enacted into law in

Section 301 of the Housing and Urban-Rural Recovery Act of

1983, Pub. L. No. 98-181, 97 Stat 1153. Section 17 is

codified at 42 U.S.C. 1437o. The regulations for the

program are codified at 24 CFR Part 511 (Exhibit 1.1)

1-2 OBJECTIVES OF THE HANDBOOK: The handbook is designed to

fulfill several objectives. These are:

A. To provide insight into the current interpretation of

program regulations.

B. To provide techniques and establish a process for

implementing the regulations of the program.

C. To provide examples to clarify and emphasize program

requirements.

D. To provide a hands-on resource for new and

inexperienced staff as well as a reference guide for

all HUD staff and local officials working with the

program.

1-3 ORGANIZATION OF THE HANDBOOK. The Handbook is divided

into the following major parts:

Part I - Introduction, which includes the introductory

information and definitions in this handbook, background

information on the program design and philosophy of the

program, and information on how to request waivers.

Part II - Program Administration Guidelines for Grantees,

which includes chapters on the submission and approval of

the Program Description, State and HUD-Administered

Programs for Small Cities, and consortia and grantee grant

administration and performance requirements.

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Part III - Funds Management and Cash and Management

Information System Management, which includes a chapter on

funds management including how the funds are allocated by

formula as well as how funds are reallocated by Regional

and Field Offices, and a chapter on the Cash and

Management Information (C/MI) System and how it is used by

grantees and HUD offices.

Part IV - Tenant Assistance and Relocation, which includes

chapters on the tenant assistance policy required of all

grantees, applicable relocation requirements, and the

Section 8 resources which may be available to the program

and how they may be used.

Part V - Program Administration Guidelines for HUD

Field Offices, which includes chapters on HUD monitoring

and close out responsibilities.

Appendix, which includes the required and suggested forms

to be used in administering the program and other

pertinent references.

1-4 BACKGROUND OF THE RENTAL REHABILITATION PROGRAM

A. The Need For The RRP. In 1980, an examination of

various data related to housing patterns in the

United States revealed that one-third of all housing

in this country was rental housing. Eighty-three

percent of that rental housing consisted of projects

containing 20 or less units, with 60 percent of all

rental units contained in projects of four or less

units. Additionally, more than one-third of these

units need repairs. The data also evidenced that

41 percent of the nation\'s rental units are occupied

by very low-income households (i.e., those with

incomes of 50 percent or less of the local area

median income) and 62 percent are lower income (i.e.,

those with incomes below 80 percent of median.)

Other data shows that one-half of the very low-income

households pay more than 50 percent of their income

for housing. All of the data taken together suggests

that a high percentage of lower-income households are

renters occupying sub-standard units in relatively

small projects. The data further indicated that the

very low-income households among this group would

require financial assistance if they were to be able

to afford rents charged for standard rental units.

It was clear to the Department that neither CDBG

funded rehabilitation programs, which were used

primarily to finance rehabilitation of single family,

owner-occupied projects, nor other programs

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administered by the Department were significantly

addressing the needs of smaller rental projects or

targeting financial assistance to the low income

tenants of these smaller projects. The Department\'s

response was to design the Rental Rehabilitation

Program.

B. The Design of the Rental Rehabilitation Program. The

national objective of the RRP is to increase the

supply of standard rental housing, available and

affordable to lower income tenants, in an efficient

and cost-effective manner. The RRP is designed to

meet this objective while preserving the tenants\'

freedom to choose where they will live. Three

innovative concepts are incorporated into the RRP

design: (1) the split subsidy approach which

separates production subsidies from tenant rent

subsidies; (2) operation of the program in the

context of the free market place; and (3) the

prohibition against the imposition of State or local

rent controls. While the remainder of this paragraph

discusses the basic principles underlying the program

design, the specific requirements against which

grantee compliance is measured are set forth in the

regulations at 24 CFR 511, and are explained in the

remainder of this Handbook.

1\. The Split Subsidy Approach. The design of the

program separates the two subsidies available to

RRP assisted projects\--the RRP production

subsidies used to support the rehabilitation of

the rental units and the rental subsidies used

to assist lower income tenants by making it

possible for them to continue living in the

rehabilitated project or to move to other

standard housing. These rental subsidies are

usually provided under HUD\'s Section 8

certificate and housing voucher programs.

a\. RRP Production Subsidy. The RRP production

subsidy is a one-time, front-end subsidy

provided to an investor to make

rehabilitation economically feasible at

market rents. It is the public funding

provided to an investor to make up the

difference between the cost of

rehabilitating the unit and the economic

value of the unit to the investor. The

economic value of the unit is determined in

a free market by supply and demand factors

that dictate the maximum rent the unit can

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command. Because the prime motive for real

estate investment, like alternative

investment modes, is a profit on the

investment, income from the investment

should be sufficient to pay all operating

expenses and debt service, as well as yield

a profit to the investor. When

rehabilitation is being considered, the

projected income should also cover the new

debt service required for rehabilitation

financing. When after-rehabilitation free

market rents will not provide sufficient

income to do so, then a RRP production

subsidy can be provided to make the

rehabilitation financially feasible for the

investor.

b\. Rental Subsidy. The rental subsidy,

usually provided under HUD\'s Section 8

certificate or housing voucher programs,

generally represents the difference between

what the tenant can afford to pay in rent,

based on the tenant\'s income, and the

actual free market rent of the unit.

Unlike the production subsidies, which are

provided to the property owner, rental

subsidies are provided for tenants. In the

RRP, the tenant is free to use the tenant

subsidy to remain in residency in the RRP

project, or to move to another standard

rental unit of his/her choice, just as any

other consumer of rental housing with

purchasing power may do. The freedom of

housing choice afforded to project tenants

through the program sets the RRP apart from

other HUD project-based programs which tie

the tenant subsidy (and thus the tenant) to

the project being assisted. Because the

tenants can move and take their rental

subsidies with them, the investor should be

economically motivated to maintain the

project to continue to attract tenants at

market rents.

2\. The RRP Free Market Context. The RRP is not

only designed to operate in the free market

place, but its relative success is dependent

upon how well free market principles are adhered

to by program participants. Because in a free

market there are no artificial limits on rents

and no financial props to support investors,

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owners of rental property must take market risks

in order to achieve economic rewards. Under the

design of the RRP, with its split subsidy

feature, an investor\'s return on investment is

based on market rents, sound project management,

a positive cash flow, tax advantages (although

the latter have been sharply reduced by tax

reform), and appreciation in the value of the

property. The free market context of the RRP

design permits the prudent investor to profit

from participation in the RRP, provided the

investor\'s rehabilitation investment is planned

and carried out carefully.

a\. Market Rents. The market rent for a unit

is the rent that the unit can command from

unassisted tenants on the open market,

given its location and the cost of other

comparable units in the area. The market

rent of a given unit thus can rise or fall

according to prevailing economic

conditions, maintenance costs, and the size

and condition of the unit in relation to

other units in the neighborhood. In the

RRP, the market rent is the key variable in

determining the amount of RRP subsidy to be

provided and in selecting appropriate

neighborhoods in which to conduct the

program.

b\. Relationship of Market Rents to Fair Market

Rents (FMRs). Critical to the successful

operation of the RRP is the understanding

of the difference between market rents and

HUD Section 8 Fair Market Rents (FMRs). As

cited above, a market rent is the rent that

a unit can command in a free and open

marketplace. The HUD Fair Market Rent is

the amount the Federal government estimates

is needed to rent a modest, standard rental

housing unit plus utilities in an area. A

FMR is determined by conducting a survey of

rents charged for standard units with a

certain number of bedrooms in a defined

market area. FMRs for the particular area

surveyed are set at rent levels

representing the 45th percentile of rents

for all units with the same number of

bedrooms. FMRs are used to calculate

rental assistance payments under the

Section 8 Existing Housing Certificate

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program and the Section 8 housing voucher

program (where a FMR is used to set the

initial \"payment standard\"). It is, of

course, critical that neighborhoods

selected for the RRP have market rents

within the HUD FMRs so that the Section 8

subsidies provided to a RRP project tenant

is sufficient to enable the tenant to

afford the rehabilitated unit. The RRP,

therefore, is not intended to operate

successfully in every area of every city.

It is also imperative that RRP grantees

understand that the Section 8 FMR for a

broader market area does not necessarily

bear any relationship to the free market

rent of a particular unit in a particular

neighborhood selected for the RRP. Project

underwriting rent determinations must be

made based on actual free market rents in

the target neighborhood, not Section 8 Fair

Market Rents, if the program is to be

successful.

3\. Prohibition Against Rent Controls. The

imposition of State and local rent controls on

projects is not permitted in the RRP (except

where local, generally applicable rent control

ordinances exist and have existed prior to the

November 30, 1983 enactment of the authorizing

legislation for the program). Many subsidized

housing programs have effectively tied the

tenant to the unit through a blend of production

and rental subsidies and rent limitations over a

fixed period of time. Such programs have not

only been expensive, they have severely

restricted the freedom of housing choice among

lower income tenants in need of rental

assistance.

a\. The Cost of Rent Control. The costs

resulting from the imposition of project

rent controls are far greater than they

might appear. For instance, investors are

giving up more than a projected rent loss.

By agreeing to a bureaucratic overlay

controlling their decisions, investors are

no longer able to respond freely to changes

in maintenance or other costs. Rational

investors faced with this situation will

either decline participation in rent

controlled programs, or insist on a deeper

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subsidy that in all probability will be

even greater than the value of the rent

lost through the rent limitation.

Additionally, any time a controlled rent

level falls below the true free market rent

level, an investor is no longer subjected

to competitive pressures to maintain the

real market value of the units. On the

contrary, the investor is provided a strong

financial incentive to withdraw capital

from the project, generally through

reducing maintenance expenditures, to

maximize the return on investment. In

effect, the investor pockets what would be

a maintenance expenditure to reimburse the

loss represented by the gap between real,

free market rent value and the controlled,

artificially lower value. Of course,

reduced maintenance will lower the real

market value of the unit over time.

However, it is not usually worthwhile for

the tenant to move until the investor has

allowed the disinvestment to drop the value

so low that it is worth less than the

artificially imposed rent level. At this

point the tenant may choose to look for

another unit, but by that time the purpose

for the investment of public funds (i.e.,

the availability of a quality unit at an

affordable rent) has been defeated.

1-5 WAIVERS. The HUD Assistant Secretary for Community

tanning and Development may waive any requirement of the

RRP regulations at 24 CFR 511 or this Handbook not

required by law whenever it is determined that undue

hardship will result from applying the requirement or

where application of the requirement would adversely

affect the purposes of the Rental Rehabilitation Program.

Waivers shall be in writing, citing the rule and/or

Handbook provision to be waived and the authority for the

waiver and be supported by documentation of the pertinent

facts. Where only a portion of the rule or handbook

provision is to be waived, then the waiver should

expressly limit itself to that portion. Grantees should

address their waiver requests to the appropriate

Field Office. Field offices will forward such requests to

the Assistant Secretary for Community Planning and

Development to the attention of the CPD Field Coordination

Unit. This procedure will assist in establishing a

central point of contact to coordinate regulatory waivers

that are to be published in the Federal Register.

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1-6 DEFINITIONS. The following are definitions of various

terms used in this handbook:

\"Administrative Costs\" are reasonable and necessary costs,

as defined in 24 CFR 511.71 and OMB Circular A-87,

incurred by the grantee itself, or by a unit of general

local government pursuant to a written cost-sharing

agreement with a State grantee (see 24 CFR 511.71(c)), in

carrying out the Rental Rehabilitation Program.

\"Affordable Rents\" See \"Rents Affordable to Lower-Income

Families.\"

\"Applicable Surface\" means all intact and nonintact

interior and exterior painted surfaces of a residential

structure.

\"Cash and Management Information (C/MI) System\" means the

Cash and Management Information System for drawdown of

Rental Rehabilitation grant amounts and collection of

program information described in Section 511.75.

\"Certificate\" means the document issued by a PHA to a

family eligible for participation in the tenant-based

Section 8 Certificate Program 24 CFR Part 882.

\"Chewable Surface\" means all chewable protruding painted

surfaces up to five feet from the floor or ground, which

are readily accessible to children under 7 years of age,

e.g., protruding corners, windowsills and frames, doors

and frames, and other protruding woodwork.

\"Chief Executive Officer\" of a governmental entity means

the elected official, or the legally designated official,

who has the primary responsibility for the conduct of that

entity\'s governmental affairs. Examples of the \"chief

executive officer\" are: the elected mayor of a

municipality; the elected county executive of a county;

the chairperson of a county commission or board in a

county that has no elected county executive; the official

designated under law by the governing body of the unit of

general local government; and the Governor of a State.

\"City\" means a unit of general local government that was

classified as a city under Section 102(a)(5) of the

Housing and Community Development Act of 1974 for purposes

of the Community Development Block Grant (CDBG)

Entitlement Program for the fiscal year immediately

preceding the fiscal year for which rental rehabilitation

grant amounts are made available.

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\"Commit to specific local project\" or \"commitment\" means:

\(a\) for a project which is privately owned when the

commitment is made, a written legally binding agreement

between a grantee (or in the case of a State distributing

rental rehabilitation grant amounts to units of general

local government, a State recipient) and the project

owner, under which the grantee or State recipient agrees

to provide rental rehabilitation grant amounts to the

owner for an identifiable rehabilitation project that can

reasonably be expected to start construction within

90 days of the agreement and in which the owner agrees to

start construction within that period; or (b) for a

project that is publicly owned when the commitment is

made, the Pre-Rehabilitation Report submitted by the

grantee under the C/MI System which identifies a specific

rehabilitation project that will start rehabilitation

within 90 days of HUD\'s receipt of the Pre-Rehabilitation

Report. Under both (a) and (b) of this definition, the

date HUD enters into the C/MI System an acceptable

Pre-Rehabilitation Report is deemed to be the date of project

commitment.

\"Completion of Rehabilitation\" means all necessary

rehabilitation work has been performed and the project in

HUD\'s judgment complies with all applicable requirements

of 24 CFR 511 (including the rehabilitation standards

adopted under 511.10(e); the final drawdown has been

disbursed for the project; for projects that were publicly

owned when commitment occurred, the project has been

legally transferred to a private owner subject to the

owner obligations required under 24 CFR 511.11(d); and a

Project Completion Report has been submitted by the

grantee or State recipient and processed in the C/MI

System, as prescribed by HUD.

\"Completed Project\" means a project that meets the

\"Completion of Rehabilitation\" definition above.

\"Congregate Housing\" see \"Unit.\"

\"Contract Agent\" means any person, privately-controlled

nonprofit corporation, or other private entity performing

program administrative services on behalf of the grantee.

\"County or Urban County Recipient\" means a unit of general

local government within an urban county-grantee, to which

the urban county distributes rental rehabilitation grant

amounts and which carries out the program independently

(except for C/MI activities), including entering into

project agreements with owners in its own name.

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\"Defective Paint Surface\" means paint on applicable

surfaces that is cracking, scaling, chipping, peeling or

loose.

\"Deposit Account\" means an account identified or

established in a local financial institution as described

in Chapter 11 of this Handbook for the purpose of

receiving deposits of Rental Rehabilitation grant funds on

behalf of grantees or State recipients (if authorized by

the State grantee to receive deposits).

\"Designated Public Agency\" means, in the case of grantees

other than States, a single purpose unit of local

government which is not under the direct administrative

control of the Chief Executive Officer of the grantee

(such as an independent PHA, a State agency, or a

publicly-controlled nonprofit organization, which performs

program administrative services on behalf of the grantee.

In the case of States, the term includes independent State

agencies not under the direct administrative control of

the Governor (such as a State PHA or Housing Finance

Agency), or publicly-controlled nonprofit corporations, or

local public bodies, which perform administrative services

on behalf of the grantee. The term does not include State

recipients and urban county recipients.

\"Displaced Person\" means any person (family, individual,

business, nonprofit organization or farm) that moves from

real property, or moves personal property from real

property, permanently and involuntarily as a direct result

of rehabilitation, demolition or acquisition for a project

assisted under the RRP, as described in 24 CFR 511.14(g).

\"Drawdowns\" are funds disbursed to the grantee\'s or State

recipient\'s deposit account upon request by the grantee or

State recipient when needed for immediate payment for

completed construction work or other eligible project

costs. The term also may be used to refer to funds

disbursed to the grantee\'s deposit account for

administrative costs.

\"Elevated blood lead level or EBL\" means the excessive

absorption of lead, that is, a confirmed concentration of

lead in whole blood of 25 ug/dl (micrograms of lead per

deciliter of whole blood) or greater.

\"Family\" has the same meaning as family, as defined at

24 CFR 812.2.

\"Grant Agreement\" refers to forms HUD-40015 and

HUD-40015.1, which, when executed, represent a formal grant

agreement between HUD and the grantee.

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\"Grantee\" means (a) any city or urban county or approved

consortium receiving a grant on the basis of the formula

contained in subpart D of 24 CFR 511: (b) any State

administering a rental rehabilitation program, as provided

in 511.51; (c) any city or urban county receiving a rental

rehabilitation grant from HUD, as provided in 511.52.

Grantees execute a grant agreement with HUD.

\"Housing Voucher\" means the document issued by a PHA to a

family eligible for participation in the Section 8 Housing

Voucher Program under 24 CFR 887.

\"HUD\" mean the Department of Housing and Urban

Development.

\"Large Family\" means a family of five or more members.

\"Lead-based Paint Surface\" means a paint surface, whether

or not defective, identified as having a lead content

greater or equal to 1.0 mg/cm2 (milligram per square

centimeter) .

The \"Letter of Credit Control System (LOCCS)\" means the

automated HUD system for authorizing and/or initiating

disbursements through wire transfers. It will be used to

process the RRP grant payment information to Treasury and

will automatically update the Program Accounting System

(PAS) records with the disbursement data once the drawdown

is requested and the payment processed.

\"Lower Income Family\" means a lower income family, as

defined in 24 CFR 813.102.

\"Manufactured housing\" means a dwelling unit which meets

the requirements of 24 CFR 511.11(c)(4).

\"Minority Business Enterprise (MBE)\" means a business

enterprise which is at least 51 percent owned by one or

more minority individuals, or in the case of any publicly

owned business, at least 51 percent of the voting stock of

which is owned by one or more minority individuals, and

whose management and daily operations are controlled by

one or more of such individuals.

\"Minority Property Owner\" means a minority person who owns

and controls one or more dwelling units. Such persons

include blacks, American Indians, or Alaskan Natives,

Hispanics, Asians, and Pacific Islanders. The phrase

\"owns and controls\" means that a minority person(s), or a

for-profit business or non-profit organization controlled

by a minority person(s), possesses at least 51 percent of

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the ownership of the dwelling unit(s) and controls its

daily management and operation.

\"MSA\" means Metropolitan Statistical Area, as defined by

the U.S. Bureau of Census.

\"Obligation of Funds\" occurs with respect to RRP grants

when an authorized HUD official signs the Funding Approval

Grant Agreement and notifies the grantee in writing of its

grant approval for any fiscal year.

\"Owner\" means one or more individuals, corporations,

partnerships, or other privately-controlled legal entities

that hold valid legal title to the property to be

rehabilitated.

\"Payee\" means any person/entity entitled to receive

payments of RRP monies on behalf of the project owner from

a grantee or State recipient (usually a contractor who has

performed work), or in the case of administrative costs,

the person/entity entitled to payment of such costs.

\"Program Account\" means the computerized information which

will be maintained in the C/MI System on all funds

available for each grantee or State recipient by

fiscal year.

\"Program Accounting System (PAS)\" means the automated HUD

accounting system which maintains the accounting data by

grant number and produces accounting and management

information reports.

\"Program Income\" has the meaning set forth in 24 CFR

511.76(b).

\"Project\" means an entire building (including a

manufactured housing unit) or two or more contiguous

buildings under common ownership and management, to be

rehabilitated with a rental rehabilitation grant, under a

commitment by the owner, as a single undertaking under

this part.

\"Project Agreement\" means the legally binding agreement

between the project owner and the grantee or State

recipient referred to in the foregoing definition of

\"Commit to a specific local project.\"

\"Project File\" means the computerized information which

will be maintained in the C/MI System for every project

assisted by a grantee and, in the case of a State

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administering programs through State recipients, the State

recipient of funds.

\"Project Set-Ups\" are calls made by the grantee or State

recipient to the toll-free C/MI numbers to establish a

project just prior to commitment. The set-up call will

earmark funds for a particular project, but not actually

make them available.

\"Public Housing Agency (PHA)\" means any State, county,

municipality of other government entity or public body (or

agency or instrumentality thereof) that is authorized to

engage in or assist in the development or operation of

housing for lower income families.

\"Racial and Ethnic Group Definitions.\" Below are

definitions of the racial and ethnic groups used in

connection with the RRP. The category which most closely

reflects an individual\'s recognition in his/her community

should be used for purposes of reporting on a person of

mixed racial and/or ethic origins.

1\. \"White.\" A person having origins in any of the

original peoples of Europe, North Africa, or the

Middle East, but not of Hispanic origin.

2\. \"Black.\" A person having origins in any of the black

racial groups of Africa, but not of Hispanic origin.

3\. \"American Indian or Alaskan Native.\" A person having

origins in any of the original peoples of North

America, and who maintains cultural identifications

through tribal affiliations or community

recognition.

4\. \"Hispanic.\" A person of Mexican, Puerto Rican,

Cuban, Central or South American or other Spanish

culture or origin, regardless of race.

5\. \"Asian or Pacific Islander.\" A person having origins

in any of the original peoples of the Far East,

Southeast Asia, the Indian Subcontinent, or the

Pacific Islands. For example, this area would

include China, Indian, Japan, Korea, the Philippine

Islands, and Samoa.

\"RRP\" means the Rental Rehabilitation Program.

\"Rents affordable to lower income families\" means that the

sum of the utility allowance and the rent payable monthly

to the owner with respect to a unit is at or below the

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applicable fair market rent published under 24 CFR Part

888 for the Section 8 Existing Housing Program (24 CFR

Part 882) or at or below such higher maximum Gross Rent as

approved by HUD for units of a given size or type under

24 CFR 882.106(a)(3). In the case of cooperative or

mutual housing, rent means the occupancy charges under the

occupancy agreement between the members and the

cooperative.

\"Single Room Occupancy (SRO) Housing\" see \"unit.\"

\"State\" includes any of the 50 States and the Commonwealth

of Puerto Rico.

\"State Recipient\" means any unit of general local

government to which a State distributes rental

rehabilitation grant amounts, as provided in 24 CFR

511.51(a)(2) and (3). A State recipient generally carries

out the program independently including entering into

agreements with owners in its own name.

\"Unit\" or \"dwelling unit\" means a residential space that

qualifies under the laws of the State and locality and

under this part as a place of permanent habitation or

abode for a family, including an apartment or house that

contains a living room, kitchen area, sleeping area and

bathroom(s) or such other definition as may be proposed by

a grantee and approved by HUD under this part. The HUD

Field Office may approve congregate units meeting the

requirements of 24 CFR 882.109(m) or single room occupancy

units meeting the requirements of 24 CFR 882.109(p) as

zero bedroom units for purposes of the RRP.

\"Unit of General Local Government\" means any city, county,

town, township, parish, village, or other general purpose

political subdivision of a State, and the District of

Columbia.

\"Urban County\" means a county that was classified as an

urban county under Section 102(a)(6) of the Housing and

Community Development Act of 1974 for the fiscal year

immediately preceding the fiscal year for which rental

rehabilitation grant amounts are made available.

\"Utility Allowance\" means the amount determined by a PHA

under 24 CFR Part 882 and 887 for the cost of utilities

(except telephones) and other housing services that is not

included in the rent payable to the owner, but is the

responsibility of the family occupying the unit.

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7360.01

\"Very Low-Income Family\" means a very low-income family,

as defined in 24 CFR 813.102.

\"Voucher (or Certificate) Payment\" means the housing

assistance payable on behalf of eligible families

participating in the housing voucher (or Certificate)

program authorized under 24 CFR 882 or 887, as

applicable.

\"Women\'s Business Enterprise (WBE)-\" is a business that is

at least 51 percent owned by a woman or women who also

control and operate it. \"Control\" means exercising the

power to make policy decisions. \"Operate\" means being

actively involved in the day to day management.

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