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[Federal Register Volume 89, Number 232 (Tuesday, December 3, 2024)]
[Notices]
[Pages 95806-95808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28314]

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-6493-N-01]

Section 8 Housing Assistance Payments Program--Annual Adjustment 
Factors, Fiscal Year 2025

AGENCY: Office of the Assistant Secretary for Policy Development and 
Research, Department of Housing and Urban Development, HUD.

ACTION: Notice of fiscal year (FY) 2025 Annual Adjustment Factors 
(AAFs).

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SUMMARY: The United States Housing Act of 1937 requires that certain 
assistance contracts signed by owners participating in the Department's 
Section 8 housing assistance payment programs provide annual 
adjustments to monthly rentals for units covered by the contracts. For 
owners subject to a Reserve for Replacement deposit requirement, HUD 
also requires that the amount of the required deposit be adjusted each 
year by the AAF. This notice announces FY 2025 AAFs for adjustment of 
contract rents on the anniversary of those assistance contracts. The 
factors are based on a formula using residential rent and utility cost 
changes from the most recent annual Bureau of Labor Statistics Consumer 
Price Index (CPI) survey and market rents from a total of six possible 
private sector rent data sources. AAFs continue to be based on the 
shelter and gross rent inflation factors methodology used in HUD's Fair 
Market Rent calculation that was adopted in FY 2024.

DATES: The FY 2025 AAFs are effective December 3, 2024.

FOR FURTHER INFORMATION CONTACT: Ryan Jones, Director, Management and 
Operations Division, Office of Housing Voucher Programs, Office of 
Public and Indian Housing, 202-708-1380, for questions relating to the 
Moderate Rehabilitation programs (not the Single Room Occupancy 
program); Norman A. Suchar, Director, Office of Special Needs 
Assistance Programs, Office of Community Planning and Development, 202-
402-5015, for questions regarding the Single Room Occupancy (SRO) 
Moderate Rehabilitation program; Jennifer Larson, Director, Office of 
Asset Management, Office of Multifamily Housing, 202-402-7769, for 
questions relating to all other Section 8 programs; and Adam Bibler, 
Director, Program Parameters and Research Division, Office of Policy 
Development and Research, 202-402-6057, for technical information 
regarding the development of the schedules for specific areas or the 
methods used for calculating the AAFs. The mailing address for these 
individuals is: Department of Housing and Urban Development, 451 7th 
Street SW, Washington, DC 20410. 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: The AAFs are applied at the anniversary of 
Housing Assistance Payment (HAP) contracts for which rents are to be 
adjusted using the AAF for those calendar months commencing after the 
effective date of this notice. The amount that an owner is required to 
deposit to the Reserve for Replacement account is also adjusted 
annually by the most recently published AAF, at the HAP contract 
anniversary. AAFs are distinct from, and do not apply to the same 
properties as, Operating Cost Adjustment Factors (OCAFs). OCAFs are 
annual factors used to adjust rents for project-based rental assistance 
contracts issued under Section 8 of the United States Housing Act of 
1937 and renewed under section 515 or section 524 of the Multifamily 
Assisted Housing Reform and Affordability Act of 1997 (MAHRA). HUD has 
published OCAFs for 2024 in the Federal Register at 88 FR 83571. The 
AAFs are also distinct from Renewal Funding Inflation Factors which 
help determine renewal funding for public housing agencies operating 
the Housing Choice Voucher program. A separate Federal Register notice, 
to be published following the passage of FY 2025 HUD appropriations, 
will contain the 2025 Renewal Funding Inflation Factors.
    Tables showing AAFs will be available electronically from the HUD 
data information page at http://www.huduser.gov/portal/datasets/aaf.html.

I. Applying AAFs to Various Section 8 Programs

    AAFs established by this notice are used to adjust contract rents 
for units assisted in certain Section 8 housing assistance payment 
programs during the initial (i.e., pre-renewal) term of the HAP 
contract. There are two categories of Section 8 programs that use the 
AAFs:
    Category 1: The Section 8 New Construction, Substantial 
Rehabilitation, and Moderate Rehabilitation programs; and
    Category 2: The Section 8 Loan Management Set-Aside (LMSA) and 
Property Disposition (PD) programs.
    Each Section 8 program category uses the AAFs differently. The 
specific application of the AAFs is determined by the law, the HAP 
contract, and appropriate program regulations or requirements.
    AAFs are not used in the following cases:
    Renewal Rents. AAFs are not used to determine renewal rents after 
expiration of the original Section 8 HAP contract. In general, renewal 
rents are established in accordance with the statutory provision in 
MAHRA, as amended, under which the HAP is renewed. After

[[Page 95807]]

renewal, annual rent adjustments will be provided in accordance with 
MAHRA.
    Budget-based Rents. AAFs are not used for budget-based rent 
adjustments. For projects receiving Section 8 subsidies under the LMSA 
program (24 CFR part 886, subpart A) and for projects receiving Section 
8 subsidies under the PD program (24 CFR part 886, subpart C), contract 
rents are adjusted, at HUD's option, either by applying the AAFs or by 
budget-based adjustments in accordance with 24 CFR 886.112(b) and 24 
CFR 886.312(b). Budget-based adjustments are used for most Section 8/
202 projects.
    Housing Choice Voucher Program. AAFs are not used to adjust rents 
in the Tenant-Based or the Project-Based Voucher programs.
    Reserve for Replacement. The amount that an owner is required to 
deposit to the Reserve for Replacement account is adjusted annually by 
the AAF at the HAP contract anniversary.

II. Adjustment Procedures

    This section of the notice provides a broad description of 
procedures for adjusting the contract rent. Technical details and 
requirements are described in HUD notices H 2002-10 (Section 8 New 
Construction and Substantial Rehabilitation, Loan Management, and 
Property Disposition) and PIH 97-57 (Moderate Rehabilitation). HUD 
publishes two separate AAF Tables, Table 1 and Table 2. The difference 
between Table 1 and Table 2 is that each AAF in Table 2 is 0.01 less 
than the corresponding AAF in Table 1. Where an AAF in Table 1 would 
otherwise be less than 1.0, it is set at 1.0, as required by statute; 
the corresponding AAF in Table 2 will also be set at 1.0, as required 
by statute. Because of statutory and structural distinctions among the 
various Section 8 programs, there are separate rent adjustment 
procedures for the three program categories:

Category 1: Section 8 New Construction, Substantial Rehabilitation, and 
Moderate Rehabilitation Programs

    In the Section 8 New Construction and Substantial Rehabilitation 
programs, the published AAF factor is applied to the pre-adjustment 
contract rent. In the Section 8 Moderate Rehabilitation program (both 
the regular program and the single room occupancy program), the 
published AAF is applied to the pre-adjustment base rent.
    For Category 1 programs, the Table 1 AAF factor is applied before 
determining comparability (rent reasonableness). Comparability applies 
if the pre-adjustment gross rent (pre-adjustment contract rent plus any 
allowance for tenant-paid utilities) is above the published Fair Market 
Rent (FMR).
    If the comparable rent level (plus any initial difference) is lower 
than the contract rent as adjusted by application of the Table 1 AAF, 
the comparable rent level (plus any initial difference) will be the new 
contract rent. However, the pre-adjustment contract rent will not be 
decreased by application of comparability.
    In all other cases (i.e., unless the contract rent is reduced by 
comparability):
     Table 1 AAF is used for a unit occupied by a new family 
since the last annual contract anniversary.
     Table 2 AAF is used for a unit occupied by the same family 
as at the time of the last annual contract anniversary.

Category 2: Section 8 Loan Management Program (24 CFR Part 886, Subpart 
A) and Property Disposition Program (24 CFR Part 886, Subpart C)

    Category 2 programs are not currently subject to comparability. 
Comparability will again apply if HUD establishes regulations for 
conducting comparability studies under 42 U.S.C. 1437f(c)(2)(C).
    The applicable AAF is determined as follows:
     Table 1 AAF is used for a unit occupied by a new family 
since the last annual contract anniversary.
     Table 2 AAF is used for a unit occupied by the same family 
as at the time of the last annual contract anniversary.

Category 3: Reserve for Replacement

    The amount of the deposit to the Reserve for Replacement account 
must be increased annually using the most recently published ``AAF with 
Highest Utility Excluded'' for the Metropolitan/Region in which the 
project is located as described in Section IV below. This adjustment 
must be made without regard to vacancies.

III. When To Use Reduced AAFs (From AAF Table 2)

    In accordance with Section 8(c)(2)(A) of the United States Housing 
Act of 1937 (42 U.S.C. 1437f(c)(2)(A)), the AAF is reduced by 0.01:
    In Section 8 programs, for a unit occupied by the same family at 
the time of the last annual rent adjustment (and where the rent is 
not reduced by application of comparability (rent reasonableness)).

    The law provides that:

    [F]or any unit occupied by the same family at the time of the 
last annual rental adjustment, where the assistance contract 
provides for the adjustment of the maximum monthly rent by applying 
an annual adjustment factor and where the rent for a unit is 
otherwise eligible for an adjustment based on the full amount of the 
factor . . . 0.01 shall be subtracted from the amount of the annual 
adjustment factor (except that the factor shall not be reduced to 
less than 1.0), and the adjusted rent shall not exceed the rent for 
a comparable unassisted unit of similar quality, type and age in the 
market area. 42 U.S.C. 1437f(c)(2)(A).

    Legislative history for this statutory provision states that ``the 
rationale [for lower AAFs for non-turnover units is] that operating 
costs are less if tenant turnover is less . . . .'' (see Department of 
Veteran Affairs and Housing and Urban Development, and Independent 
Agencies Appropriations for 1995, Hearings Before a Subcommittee of the 
Committee on Appropriations 103d Cong., 2d Sess. 591 (1994)). The 
Congressional Record also states the following:

    Because the cost to owners of turnover-related vacancies, 
maintenance, and marketing are lower for long-term stable tenants, 
these tenants are typically charged less than recent movers in the 
unassisted market. Since HUD pays the full amount of any rent 
increases for assisted tenants in section 8 projects . . . HUD 
should expect to benefit from this `tenure discount.' Turnover is 
lower in assisted properties than in the unassisted market, so the 
effect of the current inconsistency with market-based rent increases 
is exacerbated. (140 Cong. Rec. 8659, 8693 (1994)).

IV. How To Find the AAF

    AAF Table 1 and Table 2 are posted on the HUD User website at 
http://www.huduser.gov/portal/datasets/aaf.html. Both tables provide 
the Regional and Metropolitan Component Areas to be used in selecting a 
project's geographic area for the AAF. For projects located in non-
metropolitan areas, select the Query Tool, AAF Documentation, State, 
then county to determine which Metropolitan Component Area to use when 
selecting the AAF for the project.
    There are two numeric columns in each AAF table. The first column 
is used to adjust contract rent for rental units where the highest cost 
utility is included in the contract rent, i.e., where the owner pays 
for the highest cost utility. The second column is used where the 
highest cost utility is not included in the contract rent, i.e., where 
the tenant pays for the highest cost utility.
    The applicable AAF is selected as follows:
     Determine whether Table 1 or Table 2 is applicable. In 
Table 1 or Table 2,

[[Page 95808]]

locate the AAF for the geographic area where the contract unit is 
located.
     Determine whether the highest cost utility is or is not 
included in contract rent for the contract unit.
     If highest cost utility is included, select the AAF from 
the column for ``Highest Cost Utility Included.'' If highest cost 
utility is not included, select the AAF from the column for ``Highest 
Cost Utility Excluded.''

V. Methodology

    AAFs are rent inflation factors. Two types of rent inflation 
factors are calculated for AAFs: gross rent factors and shelter rent 
factors. The gross rent factor accounts for inflation in the cost of 
both the rent of the residence and the utilities used by the unit; the 
shelter rent factor accounts for the inflation in the rent of the 
residence but does not reflect any change in the cost of utilities. The 
gross rent inflation factor is designated as ``Highest Cost Utility 
Included'' and the shelter rent inflation factor is designated as 
``Highest Cost Utility Excluded.'' HUD calculates the AAFs based on the 
shelter and gross rent inflation factors used in FMR calculations. The 
source data for AAFs therefore come from the 23 local and 4 regional 
CPI components (rent of primary residence and household fuels and 
utilities), depending on the location of the AAF area, and are combined 
with available measures of private data sources in calculating a 
weighted average shelter and gross rent inflation factor. The private 
measures of rent used by HUD are the RealPage average effective rent 
per unit; Moody's Analytics REIS average market rent; CoStar Group 
average effective rent; CoreLogic, Inc. single-family combined 3-
bedroom median rent; Apartment List Rent Estimate; and Zillow Observed 
Rent Index.
    In calculating the AAF from these data, HUD first takes the annual 
average of each statistic, then its year-to-year change. HUD then takes 
the mean of changes from all available sources for each area. Next, HUD 
takes an average of this private-sector measure of rent inflation with 
rent inflation as captured by the CPI for the area, where the private-
sector measure is weighted at approximately 75 percent and the CPI rent 
inflation measure is weighted at approximately 25 percent. HUD has 
determined these weights by comparing the national average of the 
private rent changes and changes in CPI rent of primary residence to 
changes in the national average of recent mover rents from the American 
Community Survey (ACS) from 2018 through 2022. HUD weights the private 
data averages and overall CPI rent of primary residence in such a way 
as to minimize the root mean squared error between the resulting 
average and the ACS recent mover rents. For future AAFs, HUD will 
update the weights by adding the most recent years of ACS recent mover 
rents, private rent data, and CPI rent of primary residence to the 
analysis.
    HUD uses a local measure of private rent inflation for markets that 
are covered by at least three of the six available sources of private 
rent data. HUD combines this local measure of rent inflation with 
either the local metropolitan area CPI rent of primary residence for 
the 23 areas where such data exist or the regional CPI rent in areas 
without a local index. For areas without at least three of the six 
private rent data sources available, HUD uses a regional average of 
private rent inflation factors alongside the regional CPI rent of 
primary residence. HUD constructs the regional average by taking the 
rental unit weighted average of the change in rents of each area in a 
region that does have private rent data coverage. This ensures that 
smaller areas that are not directly covered by the private sources will 
still have current rental market conditions taken into account in the 
calculation of the rent inflation factor for such areas.
    The results of the above calculation are the ``Highest Cost Utility 
Excluded'' AAF. For the ``Highest Cost Utility Included'' AAF, HUD 
averages the result of this step with the year-to-year change in the 
CPI housing fuels and utilities index for the area in order to make the 
resulting inflation measure reflective of gross rents.

VI. Area Definitions

    To make certain that they are using the correct AAFs, users should 
refer to the Area Definitions Table section at https://www.huduser.gov/portal/datasets/aaf.html. Furthermore, users can also search for AAF 
area definitions using an online lookup tool available on HUD User at 
the link in the previous sentence. AAFs are based on the updated 
metropolitan area definitions published by the Office of Management and 
Budget (OMB) on September 14, 2018, and first incorporated by the U.S. 
Census Bureau into the 2019 ACS data and the corresponding FY 2022 
FMRs. On July 21, 2023, OMB published Bulletin No. 23-01, which 
contains revisions to metropolitan area definitions. However, the U.S. 
Census Bureau has not yet incorporated these revisions into the data 
available to HUD, and therefore HUD is not using these new definitions 
for FY 2025.

Solomon Greene,
Principal Deputy Assistant Secretary for Policy Development and 
Research.
[FR Doc. 2024-28314 Filed 12-2-24; 8:45 am]
BILLING CODE 4210-67-P
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