[Federal Register Volume 89, Number 40 (Wednesday, February 28, 2024)]
[Rules and Regulations]
[Pages 14588-14590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-04081]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 401

[Docket No. FR-6122-F-02]
RIN 2502-AJ48


Rent Adjustments in the Mark-to-Market Program

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: The Mark-to-Market program preserves affordability and 
availability of affordable rental multifamily properties with federally 
insured mortgages, reducing rents to market levels by restructuring 
existing debt to levels supportable by these rents. This final rule 
revises the Mark-to-Market program regulations to clarify that annual 
adjustment of restructured rents under the program will be based on an 
operating cost adjustment factor determined by HUD and to further 
clarify when HUD may approve rent adjustments on a budget basis. This 
final rule will bring greater clarity to the Mark-to-Market program and 
will align HUD's regulations with recent legislative changes that 
specifically allow budget-based rent adjustments for the program.

DATES: Effective: March 29, 2024.

FOR FURTHER INFORMATION CONTACT: Thomas R. Davis, Director, Office of 
Recapitalization, Office of Multifamily Housing Programs, Department of 
Housing and Urban Development, 451 Seventh Street SW, Room 6106, 
Washington, DC 20410; telephone number 202-402-7549. HUD welcomes and 
is prepared to receive calls from individuals who are deaf or hard of 
hearing, as well as individuals with speech or communication 
disabilities. To learn more about how to make an accessible telephone 
call please visit https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

SUPPLEMENTARY INFORMATION:

I. Background

    The Multifamily Assisted Housing Reform and Affordability Act of 
1997 (Title V of Pub. L. 105-65, approved October 27, 1997, and 
codified at 42 U.S.C. 1437f note) (MAHRA) authorizes the Mark-to-Market 
program, which is designed to preserve low-income rental housing 
affordability while reducing the long-term costs of federal rental 
assistance. Under the program, multifamily housing projects with above-
market rents that are subject to an expiring contract under section 8 
of the United States Housing Act of 1937 (42 U.S.C. 1437f) (Section 8) 
undergo both a restructuring of the project's HUD-insured or HUD-held 
debt and an initial renewal of its Section 8 Housing Assistance 
Payments (HAP) contract so that a new first loan is serviceable based 
on modified rents.
    On July 16, 2020, HUD issued a proposed rule in the Federal 
Register, at 85 FR 43165, which proposed to revise the Mark-to-Market 
program regulations to clarify that all annual rent adjustments for 
projects subject to a restructuring plan are solely by application of 
an operating cost adjustment factor (OCAF) established by HUD. The 
current regulations, at 24 CFR 401.412(b), authorize HUD to approve a 
request for a budget-based rent adjustment in lieu of an OCAF. HUD 
proposed to remove the budget-based rent adjustment provision as 
discussed in detail in the proposed rule at 85 FR 43166-43167.
    In addition, HUD in the proposed rule sought to revise Sec.  
401.554 to remove the statement that HUD will ``extend'' Section 8 
contracts in order to comport with HUD's standard programmatic practice 
of renewing contracts rather than extending them and also to remove a 
parenthetical reference in Sec.  401.554 to multiple renewal 
authorities for contracts subject to a Restructuring Plan.
    Subsequent to the publication of the proposed rule, Public Law 117-
328, Consolidated Appropriations Act, 2023, approved on December 29, 
2022, amended MAHRA section 515 to add a new subsection specifically 
authorizing budget-based rent adjustments for Mark-to-Market projects. 
As amended, the statute provides that HUD may, not more than once every 
10 years, adjust rents in an amount equal to the lesser of budget-based 
rents or comparable market rents for the market area upon request of an 
owner or purchaser who meet certain criteria.
    This final rule implements the statutory change enacted by the 
Consolidated Appropriations Act, 2023, as well as the revisions to 
Sec.  401.554 contemplated in the proposed rule.

II. The Public Comments

    The public comment period for the proposed rule closed on September 
14, 2020. HUD received five comments. The commenters included members 
of the public, public officials, and the assisted housing industry. 
Commenters were generally opposed to the contemplated regulatory 
changes removing the budget-based rent adjustment provision; however, 
this issue has been superseded and obviated by the statutory change 
enacted by the Consolidated Appropriations Act, 2023. The statutory 
change is generally aligned with the views expressed by commenters on 
the rent adjustment provisions. Commenters expressed no opinions with 
respect to the proposed revisions to Sec.  401.554.

Discretion To Allow Budget-Based Rent Adjustments

    Commenters stated that HUD does retain the discretion to use a 
budget-based rent adjustment at the request of the property owner 
regardless of whether Sec.  401.412(b) is revised. One commenter noted 
that in enacting MAHRA, Congress did not prohibit the Secretary's 
exercise of reasonable discretion to address extraordinary 
circumstances affecting the viability and condition of restructured 
projects over a 30-year period. Additionally, the commenter stated that 
under section 514(e) of MAHRA, the use of the mandatory ``shall'' with 
the permissive ``allow'' refutes any presumption that Congress intended 
rent adjustments by application of an OCAF to be exclusive. Congress 
did not provide that it must be the only option regardless of all 
potential circumstances at the property. In this same vein, another 
commenter stated that although Section 514 and Section 515 when read 
together make clear that the Restructuring Plan must ``allow for'' an 
OCAF as a required element of the Restructuring Plan, and an owner must 
agree to an OCAF renewal if offered by HUD, there is nothing that 
either prevents HUD from offering or an owner from accepting an 
alternate renewal option. The commenter noted that MAHRA at 514(e) uses 
the term ``allow'' when describing inclusion of an OCAF rent adjustment 
in the Restructuring Plan without the qualifying term ``only,'' and 
uses the term ``require'' for other aspects of the Restructuring Plan. 
One commenter stated that since the publication of the Final Rule in 
2000, HUD has made a ``determination'' that Section 515(b) is the 
appropriate legal authority for subsequent renewal of HAP Contracts

[[Page 14589]]

for projects with Restructuring Plans. While conceding that HUD's 
determination may be ``legally correct,'' the commenter stated a 
concern that there does not appear to have been any rulemaking or prior 
former public process to address how this determination was made. The 
same commenter opined that a plain reading of MAHRA reflects a 
requirement that the Restructuring Plan include an OCAF, and that an 
owner must agree to a subsequent OCAF renewal if offered by HUD but 
contains no language precluding other rent adjustment options. A 
commenter requested that should HUD continue to disclaim the discretion 
it once asserted, that the Secretary pursue and support legislation 
that would provide express authority to provide budget-based rent 
adjustments to restructured properties where necessary, i.e., where 
such a budget-based increase is crucial to the property's viability.
    HUD Response: The explicit provision of budget-based rent 
adjustment authority in section 524(c)(1), but not in section 514 or 
515, informed HUD's previous determination that budget-based rent 
adjustments are not available for Mark-to-Market contracts. However, 
HUD believes that the explicit authority added to section 515 provided 
in the Consolidated Appropriations Act, 2023, resolves all ambiguity 
whether HUD has legal authority to approve budget-based rent 
adjustments to address extraordinary circumstances affecting the 
viability and condition of restructured projects. This final rule does 
not include the language from the proposed rule which elicited the 
comments described above. Instead, this final rule makes conforming 
edits to HUD's regulation at 24 CFR 401.412 to align with the amended 
MAHRA statute.

Effect of the Change

    One commenter opined that assumptions made about the ability of a 
restructuring to reposition a property for a 30-year period of physical 
and financial health are, anecdotally at least, proving to be short-
sighted in many cases, and that, in the absence of options to increase 
the HAP Contract rents, these projects often lack viable options and 
provide few incentives for developers and investors willing to take on 
a preservation transaction. As a consequence, residents in projects 
restructured through the MTM program may soon find themselves living in 
buildings with rapidly increasing maintenance and repair needs with no 
viable near-term solution to reverse the building's physical and 
financial decline. One commenter stated a concern that, in a time when 
many of the approximately 2,600 properties that were restructured 
pursuant to Mark-to-Market have health and safety concerns, the 
proposed rule would limit the ability of HUD to work with property 
owners to redevelop properties by limiting the discretionary authority 
of HUD to provide a budget-based rent increase for properties, 
especially at-risk low-income properties that have operating and 
financial needs greater than the operating cost adjustment factor rent 
increase would cover.
    HUD Response: HUD believes that the now explicit authority for 
budget-based rent adjustments provides the Department a tool to support 
owners or purchasers of restructured projects in their efforts to 
address extraordinary circumstances affecting the viability and 
condition of such projects. As the Mark-to-Market portfolio continues 
to age, HUD recognizes the need for owners of some projects to receive 
additional operating funds. HUD is in the process of drafting 
processing guidance for owners or purchasers who request a budget-based 
rent increase in accordance with the new authority under MARHA section 
515.

Other Comments

    One commenter requested that with respect to the programmatic 
practice of adjusting rents annually, rents should be dropped to $0 
after three years of residence. Another commenter noted concern with 
how the proposed rule would benefit families who utilize section 8 and 
families with disabilities in rural and frontier communities. The 
commenter also stated that changing information collection methods for 
family tenants could impact initial and continuing eligibility for all 
social services programs, and that the proposed rule could impact 
smaller PHAs and landlords' ability to collect consistent rents and 
section 8 HUD payment which could lead to fewer landlords seeing the 
value of Section 8 for families.
    HUD Response: While HUD appreciates all feedback on its housing 
programs, the proposed rule and this final rule do not pertain to any 
rules or regulations related to the calculation of the tenant portion 
of rent, household information collection, or occupancy eligibility. 
HUD anticipates that residents living at properties that receive a 
budget-based rent increase will experience improved management 
operations and physical conditions as property owners will be able to 
address deferred maintenance and capital needs.

III. This Final Rule

    This final rule responds to the public comments and conforms the 
regulations to the governing statutory provision, the terms of Mark-to-
Market renewal contracts, and the Consolidated Appropriations Act, 
2023.

Sec.  401.412--Budget-Based Rent Increases

    Based on the statutory change to Section 515 of MAHRA enacted by 
the Consolidated Appropriations Act, 2023--which is generally aligned 
with the views expressed by commenters on the rent adjustment 
provisions--this final rule does not delete existing 24 CFR 401.412(b) 
as contemplated in the proposed rule. Instead, this final rule revises 
24 CFR 401.412(b) to codify the conditions necessary in order to 
receive a budget-based adjustment.

Sec.  401.554--Contract Renewals

    As discussed in the proposed rule, in this final rule HUD is 
revising the language in 24 CFR 401.554 that indicates that HUD will 
``offer to renew or extend'' a Section 8 contract, as provided in a 
project's Restructuring Plan. Because the programmatic practice is to 
offer to renew rather than to extend, HUD is deleting the words ``or 
extend'' and is also removing the parenthetical in Sec.  401.554 
suggesting that there may be more than one renewal authority for 
projects subject to a Restructuring Plan.

IV. Findings and Certifications

Regulatory Review (Executive Orders 12866, 13563, and 14094)

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and, therefore, subject to review by the Office of Management and 
Budget (OMB) in accordance with the requirements of the order. 
Executive Order 13563 (Improving Regulations and Regulatory Review) 
directs executive agencies to analyze regulations that are ``outmoded, 
ineffective, insufficient, or excessively burdensome, and to modify, 
streamline, expand, or repeal them in accordance with what has been 
learned.'' Executive Order 13563 also directs that, where relevant, 
feasible, and consistent with regulatory objectives, and to the extent 
permitted by law, agencies are to identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public. Executive Order 14094 entitled ``Modernizing 
Regulatory Review'' (hereinafter referred to as the ``Modernizing 
E.O.'') amends section 3(f) of Executive Order 12866

[[Page 14590]]

(Regulatory Planning and Review), among other things.
    This final rule codifies the authority for budget-based rent 
increases in the Mark-to-Market program enacted by the Consolidated 
Appropriations Act, 2023 (Pub. L. 117-328, December 29, 2022) and 
conforms the regulations to longstanding HUD practice and the terms of 
the renewal contracts. This final rule does not create significant 
budgetary impact on the administration of Section 8 subsidy or create 
administrative costs, nor does it alter the underlying operation of the 
Mark-to-Market program. As such, this rule does not constitute a 
``significant regulatory action'' as defined in Section 3(f) of 
Executive Order 12866, as amended by Executive Order 14094, and the 
rule was not reviewed by OMB.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally 
requires an agency to conduct a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements, unless the 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. This final rule 
codifies existing statutory interpretations of the authorities granted 
for the Mark-to-Market program. It does not create compliance costs, 
nor does it alter the underlying operation of the Mark-to-Market 
program. Therefore, the undersigned certifies that this final rule does 
not have a significant economic impact on a substantial number of small 
entities.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520), an agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information, unless the 
collection displays a currently valid Office of Management and Budget 
(OMB) control number. This final rule does not change any information 
collection requirements.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive order.

Environmental Impact

    This final rule governs the statutorily required establishment and 
review of rent schedules and related administrative and fiscal 
requirements and procedures, which do not constitute a development 
decision that affects the physical condition of specific project areas 
or building sites. Accordingly, under 24 CFR 50.19(c)(6), this final 
rule is categorically excluded from environmental review under the 
National Environmental Policy Act of 1969 (42 U.S.C. 4321).

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4; approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on state, 
local, and tribal governments, and on the private sector. This final 
rule does not impose any Federal mandates on any state, local, or 
tribal government, or on the private sector, within the meaning of the 
UMRA.

List of Subjects in 24 CFR Part 401

    Grant programs--housing and community development, Loan programs--
housing and community development, Low and moderate income housing, 
Mortgage insurance, Mortgages, Rent subsidies, Reporting and 
recordkeeping requirements.

    Accordingly, for the reasons described in the preamble, HUD amends 
24 CFR part 401 as follows:

PART 401--MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE 
RESTRUCTURING PROGRAM (MARK-TO-MARKET)

0
1. The authority for part 401 continues to read as follows:

    Authority: 12 U.S.C. 1715z-1 and 1735f-19(b); 42 U.S.C. 
1437(c)(8), 1437f(t), 1437f note, and 3535(d).


0
2. Revise and republish Sec.  401.412 to read as follows:


Sec.  401.412  Adjustment of rents based on operating cost adjustment 
factor (OCAF) or budget.

    (a) OCAF.
    (1) The Restructuring Plan must provide for annual adjustment of 
the restructured rents for project-based assistance by an OCAF 
determined by HUD.
    (2) Application of OCAF. HUD will apply the OCAF to the previous 
year's contract rent less the portion of that rent paid for debt 
service. This paragraph applies to renewals of contracts that receive 
restructured rents under either section 514(g)(1) or (2) of MAHRA.
    (b) Budget-based. Rents will be adjusted to the lesser of budget-
based rents or the comparable market rents for the market area instead 
of OCAF not more often than once every ten years upon request of an 
owner or purchaser who
    (1) Demonstrates that:
    (i) Project income is insufficient to operate and maintain the 
project, and no rehabilitation is currently needed, as determined by 
the Secretary; or
    (ii) The rent adjustment or renewal contract is necessary to 
support commercially reasonable financing (including any required debt 
service coverage and replacement reserve) for rehabilitation necessary 
to ensure the long-term sustainability of the project, as determined by 
the Secretary, and in the event the owner or purchaser fails to 
implement the rehabilitation as required by the Secretary, the 
Secretary may take such action against the owner or purchaser as 
allowed by law; and
    (2) Agrees to:
    (i) Extend the affordability and use restrictions required under 
514(e)(6) for an additional twenty years; and
    (ii) Enter into a binding commitment to continue to renew such 
contract for and during such extended term, provided that after the 
affordability and use restrictions required under 514(e)(6) have been 
maintained for a term of 30 years:
    (A) An owner with a contract for which rent levels were set at the 
time of its initial renewal under section 514(g)(2) shall request that 
the Secretary renew such contract under section 524 for and during such 
extended term; and
    (B) An owner with a contract for which rent levels were set at the 
time of its initial renewal under section 514(g)(1) may request that 
the Secretary renew such contract under section 524 for and during such 
extended term.


Sec.  401.554  [Amended].

0
3. Amend Sec.  401.554 by deleting the words ``or extend'' and the 
parenthetical from the first sentence.

Julia R. Gordon,
Assistant Secretary for Housing--Federal Housing Administration 
Commissioner.
[FR Doc. 2024-04081 Filed 2-27-24; 8:45 am]
BILLING CODE 4210-67-P