Preservation of HUD-Assisted Housing
Released: 2012-01-06T00:00:00

Introduction

The Department of Housing and Urban Development (HUD) has provided housing assistance for low-income households through numerous programs. In some programs, HUD provided assistance by entering into financial arrangements with private owners (both for-profit and nonprofit), who in turn developed and continue to own rental housing projects. In exchange for assistance from HUD, owners agreed to provide affordable housing to tenants for a period of time, anywhere from 20 to 50 years depending on the program. These HUD programs are no longer active, but they created hundreds of thousands of units of affordable housing from the late 1950s through the late 1980s, and these units continue to provide affordable housing to nearly 1.4 million families.

The affordability terms agreed to by property owners participating in these programs, sometimes referred to as "affordability restrictions," began to come to an end in the 1980s. When the restrictions on these properties end, there is a risk that they will become unaffordable to low- and moderate-income tenants, and that those tenants will be displaced. Efforts to maintain the affordability of the remaining HUD-assisted properties as their affordability restrictions come to an end are often referred to as "assisted housing preservation."

This report focuses on assisted housing preservation efforts involving six specific HUD programs, three of which provided financing assistance to private owners through low-interest loans and/or mortgage insurance, and three of which provided rental assistance to owners. These programs were often used in combination with each other, with a property owner receiving both financing assistance and rental assistance.

The following financing assistance programs are covered in this report:

The Section 202 loan program, active from 1959 to 1990. HUD extended low-interest, direct loans to property owners for durations of 40 or 50 years. The Section 202 loan program helped finance the development of approximately 216,000 units of affordable housing; today, about 145,000 units are in properties that still have active loans. The Section 221(d)(3) BMIR (Below Market Interest Rate) program , active from 1961 to 1968. HUD provided mortgage insurance for low-interest, 40-year loans to private developers. The Section 221(d)(3) BMIR program helped finance the creation of approximately 159,000 units of affordable housing, more than 15,000 of which are in properties that still have active loans insured through the BMIR program. The Section 236 program , active from 1968 to 1974. HUD provided mortgage insurance for 40-year loans along with mortgage subsidy payments to private developers. The Section 236 program helped finance the development of approximately 400,000 units of affordable housing, more than 150,000 of which are in properties that still have active loans insured through the Section 236 program.

The following rental-assistance programs are also covered in this report:

The Rent Supplement program , active from 1965 to 1973. HUD provided long-term (up to 40 years) rental-assistance contracts to owners of properties with HUD-assisted financing. Most Rent Supplement contracts were converted to Section 8 project-based contracts (described below), although nearly 13,000 units continue to receive Rent Supplement assistance. The Rental Assistance Payment (RAP) program , active in the mid-1970s. HUD provided long-term (up to 40 years) rental-assistance contracts to owners of Section 236 properties. Most RAP contracts have been converted to Section 8 assistance (described below), although nearly 16,000 units continue to receive RAP assistance. The Section 8 project-based program , active from 1974 to 1983. HUD provided long-term (up to 40 years) rental-assistance contracts to owners of newly constructed or substantially rehabilitated properties, as well as existing properties (including Section 202, Section 221(d)(3) BMIR, and Section 236 properties). Roughly 1.2 million units continue to receive Section 8 project-based rental assistance.

While other affordable housing programs also face expiring use restrictions, this report focuses on these six programs for several reasons: (1) Many of the property owners are private for-profit organizations that may have interests other than providing affordable housing when their affordability restrictions come to an end. This contrasts with, for example, the Public Housing program, where owners are quasi-governmental entities whose primary purpose is providing affordable housing. (2) The majority of the affordability restrictions in these six programs will come to an end during the next 5-15 years, depending on the program. This contrasts with newer housing production programs, such as the Section 202 Supportive Housing for the Elderly capital grants program, the Section 811 Supportive Housing for Persons with Disabilities program, or Low Income Housing Tax Credits, where affordability restrictions may extend many years into the future. (3) In past years, Congress has enacted laws that attempted to address housing preservation related to many of these six programs. These attempts met with varying success. This report does not address the programs of the Department of Agriculture's Rural Housing Service.

Figure 1 illustrates the universe of rental units that were created as part of the six programs discussed in this report. The large circle in the center represents the housing units that receive rental assistance through the Section 8, Rent Supplement, and RAP programs. The circle on the left represents housing units that continue to have active financing through the Section 221(d)(3) BMIR and Section 236 mortgage insurance programs, and the circle on the right represents units that continue to have active financing through the Section 202 loan program. As can be seen in the diagram, the area of overlap between the left and center circles represents Section 221(d)(3) BMIR and Section 236 units that also receive some form of rental assistance, while the overlap between the right and center circles shows Section 202 units that receive some form of rental assistance. See also Table A -1 , in Appendix A , which provides a summary of the properties at issue in assisted housing preservation and their characteristics.

This report is divided into six main sections. The first section provides greater detail about the six programs for which housing preservation is an issue. The second section describes how affordability restrictions come to an end. In the case of financing assistance, this can occur through mortgage prepayment or maturation, and in the case of rental assistance, it can occur when contracts expire. And in cases of both financing and rental assistance, properties may become unavailable as affordable housing due to physical deterioration. The second section also discusses what happens to tenants when affordability restrictions end. In the third section, the report describes efforts by both Congress and HUD to extend affordability restrictions in these programs. Some of these efforts have been successful, and some have not. The fourth section discusses preservation priorities—factors that interested parties (owners, tenants, local communities, HUD, Members of Congress) may take into consideration when determining whether a property should be preserved as assisted housing. In the fifth section, the report presents data about the numbers of properties and units of housing involved in the six programs discussed throughout the report. The final section of the report discusses various options regarding how to preserve assisted housing, including current legislation.

Additionally, a review and summary of the properties at issue can be found in Appendix A , and a glossary of key terms can be found in Appendix B .

Properties at Issue

Numerous HUD programs have used subsidies to private owners as a way to develop affordable rental housing units. HUD first began to interact with private developers and owners in the early 1960s, largely by providing low-interest loans, and later, Federal Housing Administration (FHA) insurance on mortgages, to developers so that they would have lower debt payments and would in turn be able to charge lower rents to tenants. Units in developments that resulted from these arrangements were considered rent restricted, with property owners agreeing to keep rents at an affordable level. Later, primarily with the creation of Section 8 project-based rental assistance in 1974, the federal government began to pay a portion of tenant rents directly to owners. In some cases, property owners received both financing and rental assistance from HUD. This section of the report discusses six HUD programs through which private owners (both for-profit and nonprofit) received assistance from HUD and for which housing preservation is now a concern.

Financing Assistance (Mortgage Loan and/or Insurance Assistance)

For a number of years during the 1960s and 1970s, HUD subsidized the production of affordable housing through incentives to private developers, including low-interest direct loans and, later, mortgage insurance through the Federal Housing Administration (FHA). The loan and mortgage insurance assistance was meant to lower building owners' costs so that the owners could charge rents that would be affordable to low- and moderate-income families. In exchange for HUD assistance, building owners agreed to maintain their properties' affordability for a period of time—generally anywhere from 20 to 50 years. The primary programs that used these incentives were the Section 202 loan program, the Section 221(d)(3) BMIR program, and the Section 236 program, each named for the section of the housing acts under which they were created. Although most of these units did not initially receive rental assistance, over the years HUD has provided rental assistance for some units to ensure that they are affordable to low-income households. (See discussion under " Rental Assistance " later in this report.)

Section 202 Loan Program

The Section 202 Supportive Housing for the Elderly program, enacted as part of the Housing Act of 1959 (P.L. 86-372), was initially a direct loan program in which the government loaned money to nonprofit organizations to develop affordable housing for elderly households—defined as those with a family member age 62 and older. (For-profit entities were not eligible to participate in the Section 202 loan program.) The Section 202 program operated as a direct loan program until 1990, when the structure of the program changed and HUD began to offer capital grants to developers instead of direct loans. This report focuses on the loan program because the affordability restrictions attached to the properties funded by capital grants will not begin to expire until approximately 2030.

The Section 202 loan program had two different phases. From the program's inception until 1974, HUD extended loans with low interest rates (generally 3%) to developers. These pre-1974 loans funded the development of housing for moderate-income, elderly households. Some units were also set aside to serve tenants with disabilities. In exchange for the assistance provided through government loans, building owners agreed to ensure that their units were affordable for 50 years. In 1974, the Housing and Community Development Act ( P.L. 93-383 ) made changes to the Section 202 loan program. The law changed the interest rate charged on government loans from 3% to the U.S. Treasury's cost of borrowing. P.L. 93-383 also made Section 8 project-based rental assistance available to owners so that units would be affordable for low-income tenants. The initial duration of the Section 8 rental-assistance contracts was 20 years. (For more information about Section 8 rental assistance, see the " Section 8 Project-Based Rental Assistance " section of this report.)

The income eligibility for tenants in Section 202 housing varies based on the phase at which a Section 202 property was developed. Units developed in the earliest years of the program, prior to 1962, have no income restrictions. Those developed from 1962 to 1974 serve tenants with low incomes—at or below 80% of area median income. In general, those developed after 1974 serve tenants with low- or very-low incomes—at or below 50% of area median income.

During the loan phase of the Section 202 program (through the early 1990s), approximately 216,204 units were developed. Currently, the number of Section 202 units with active loans (versus those funded through capital grants) is approximately 144,506.

Section 221(d)(3) Below Market Interest Rate Program

The Section 221(d)(3) Below Market Interest Rate (BMIR) program was enacted as part of the Housing Act of 1961 (P.L. 87-70) in order to provide housing for those families with incomes too high for public housing but too low for market-rate rents. Through the program, private lenders extended FHA-insured loans with interest rates of 3% and durations of up to 40 years to developers of multifamily rental housing projects of at least five units. Lenders then sold the mortgages to the Federal National Mortgage Association (Fannie Mae). The program continued until 1968, when the Section 236 program replaced it as a vehicle for producing multifamily housing for low-income families.

Section 221(d)(3) BMIR units are available to households with incomes up to 95% of the area median income. HUD approves a BMIR rent for each property, and that rent is set and adjusted based on the budget for the property, including actual operating costs, debt service, and any allowable dividend. Most residents pay the BMIR rent; however, if, after moving in, a tenant's income increases and exceeds 110% of the BMIR income limit, then the household must pay 110% of the BMIR rent. Some units are subsidized to assist tenants with low incomes through the Rent Supplement Program, though many Rent Supplement subsidies have been converted to Section 8 project-based assistance.

The Section 221(d)(3) BMIR program created approximately 159,000 units in 845 properties. Today, there are roughly 15,218 units in 124 properties with active Section 221(d)(3) BMIR financing.

Section 236 Program

The Section 236 program was enacted as part of the Housing and Urban Development Act of 1968 (P.L. 90-448). The program, which was active in providing funds to produce new housing units from 1969 through 1973, provided mortgage insurance to housing developers for the construction and rehabilitation of multifamily housing that would be affordable to low- and moderate-income families. Private nonprofit organizations, limited dividend corporations, and cooperative housing corporations were eligible to participate. In addition to mortgage insurance, the program provided (and continues to provide) mortgage subsidies to building owners through a mechanism called Interest Reduction Payments (IRPs). At the time developers built their housing, they borrowed funds at the market interest rate. The government then provided an IRP subsidy that ensured that owners would only pay a 1% interest rate on their mortgages. The low interest payments were meant to reduce the financing costs paid by owners, which would, in turn, permit owners to pass the savings on to tenants by charging lower, more affordable rents. Contracts between HUD and building owners for IRPs were initially supposed to last 40 years. However, in order to attract developers to the Section 236 program, some contracts enabled owners to prepay their mortgages after 20 years.

The Section 236 program serves households with low incomes—those earning 80% or less of the area median income—although owners may admit over-income tenants in certain circumstances. Tenants pay one of two rent levels: basic rent or market rate rent, depending on income. The basic rent is the amount the owners need to support the facilities at a 1% mortgage interest rate. Market rate rent is the amount needed to support the facilities at the mortgage interest rate without the IRPs. Both the basic rent and market rent are set by the property owner based on the budget of the individual property and are subject to HUD's approval. Tenants pay the basic rent or 30% of their income, whichever is higher, but rent cannot exceed the market rate. In addition, some tenants in Section 236 housing have their rents subsidized. HUD initially provided subsidies through either the Rent Supplement or Rental Assistance Payment (RAP) programs, but when Section 8 project-based assistance was introduced in 1974, many of the subsidies were converted to Section 8 assistance.

The Section 236 program created approximately 400,000 units of affordable housing in more than 3,600 properties; today, approximately 155,449 units in 1,418 properties continue to be insured through the Section 236 program. As many as 249,000 units continue to receive IRPs; this number is higher than the number of insured units as a result of IRP "decoupling," a process in which owners may prepay their insured mortgages and continue to receive IRPs. The process is discussed later in this report, in the section " IRP Decoupling ."

Rental Assistance

As discussed previously, the early federal housing programs provided financing assistance to private developers of affordable housing with the idea that the reduced capital and/or debt service costs would allow owners to charge low rents that would be affordable to lower-income families. Over time, it became clear that the financing assistance was not sufficient to make rents low enough to be affordable to the poorest families while still maintaining the financial viability of the properties. In order to more deeply target housing assistance to the poorest families while also ensuring that property owners received sufficient rental income to successfully operate their properties, the federal government began providing rental assistance contracts to private property owners for all or a portion of their units. The rental assistance contracts—referred to as project-based rental assistance because the assistance is tied to specific units in a project—permitted tenants to pay a lower, income-based rent, with the federal government making up the difference between a tenant's contribution and the rent for the unit, as set by HUD. With the creation of the Section 8 project-based rental assistance program in the mid-1970s, rental-assistance contracts became the primary form of federal assistance for new affordable multifamily housing developments until the program was ended in the mid-1980s.

The Rent Supplement Program

The Rent Supplement program was enacted as part of the Housing and Urban Development Act of 1965 (P.L. 89-117) to subsidize the rent payments of low-income households living in certain federally assisted properties, including those with Section 221(d)(3) mortgage insurance and Section 202 loans. Under the Rent Supplement program, HUD entered into contracts with building owners to make up the difference between 25% of tenant income (later raised to 30%) and the rent for the unit. Generally, up to 20% of units in a building were eligible for Rent Supplement payments, although the Housing and Urban Development Act of 1969 (P.L. 91-152) made up to 40% of units eligible for subsidy payments if the HUD Secretary determined it was necessary. Rent Supplement contracts were written for the duration of the HUD-insured mortgage.

The Rent Supplement program was suspended in 1973 when President Nixon imposed a moratorium on the new construction of subsidized housing (the "Nixon Moratorium"). Most Rent Supplement contracts were converted to Section 8 contracts in the mid-1980s. The main exception was properties that were financed with state funds rather than an FHA-insured mortgage. At its peak, the Rent Supplement program assisted 179,908 units. Between conversions to Section 8 and contract expirations, there are far fewer contracts today. According to HUD, the remaining Rent Supplement contracts are primarily found in state-aided properties. Today, there are about 12,847 Rent Supplement units.

The Rental Assistance Payment (RAP) Program

In the Housing and Community Development Act of 1974 ( P.L. 93-383 ), Congress created the Rental Assistance Payment (RAP) program. The RAP program was designed to provide additional rental-assistance contracts to Section 236 properties. As with Rent Supplement contracts, RAP contracts were meant to allow property owners to serve lower-income families than they otherwise might be able to serve. Since no new Section 236 commitments were entered into following the Nixon Moratorium, RAP contracts were made available to existing Section 236 properties. RAP contracts were limited to 20% of a property's units (or more at the discretion of the Secretary), and were written for the duration of the FHA-insured mortgage or 40 years, whichever was shorter.

As with the Rent Supplement program, most RAP contracts were converted to Section 8 contracts in the mid-1980s. Today, there are about 15,870 RAP units remaining.

Section 8 Project-Based Rental Assistance

In addition to creating the Rental Assistance Payment program for existing Section 236 properties, the Housing and Community Development Act of 1974 also created a new program called the Section 8 program. The Section 8 program consisted of three components: new construction, substantial rehabilitation, and existing housing certificates. The first two components were designed to promote the development of new housing, whereas the latter was designed to subsidize rents in the existing housing stock. Later, HUD expanded the use of Section 8 project-based rental assistance by making it available to properties with HUD financing assistance, including those with Section 202 loans and Section 221(d)(3) and Section 236 mortgage insurance.

New Construction, Substantial Rehabilitation, Existing Housing

Under the new construction and substantial rehabilitation components of the early Section 8 program, HUD entered into long-term (20- or 40-year) contracts with private property owners who were willing to construct new units or rehabilitate older ones to house low- and very low-income tenants. Owners could be for-profit or nonprofit entities and the contracts could cover all or part of the units in their developments. Some of these new properties were financed with FHA-insured mortgages, some were financed with state-based financing, and some were built without insured or assisted financing.

Under the Section 8 program, HUD agreed to make housing assistance payments (HAP) toward each unit covered under the contract for the duration of the contract. Those assistance payments made up the difference between a previously agreed-upon rent and the tenants' required contribution toward rent (initially 25%—later raised to 30%—of their adjusted income). The rents were generally not to exceed 110% of the Fair Market Rent (FMR) established by HUD, although they could go as high as 20% above FMR if the Secretary determined it to be necessary in special circumstances. In order to receive assistance, all assisted units had to be rented to low-income families, and some proportion of the units had to be rented to very low-income families.

The existing housing portion of the Section 8 program—also called the Section 8 certificate program—was tenant-based, meaning that the assistance was tied to a tenant rather than a unit. Under the certificate program, HUD would provide the local public housing authorities (PHAs) that own and manage public housing with renewable contracts for a specified number of certificates. PHAs would then award those certificates to eligible families, who could use them to rent the housing of their choice in the private market. HUD would pay the difference between the tenant's contribution toward the rent (30% of family income) and the rent for the unit. The contract rent was generally limited to the HUD-set FMR for the area.

The Housing and Community Development Amendments of 1978 ( P.L. 95-557 ) added a moderate rehabilitation component to the Section 8 program. Under Section 8 Moderate Rehabilitation (Mod-Rehab), rental assistance was provided to projects that were in need of repairs costing at least $1,000 per unit to make the housing decent, safe, and sanitary.

By the early 1980s, concern about the Section 8 program was growing, particularly about the development of new units under the new construction and substantial rehabilitation portions of the program. The program was perceived as having per-unit costs that were too high and development times that were too slow, which was leading to the accumulation of large amounts of unused funding. Concern was also growing about the implications of project-based assistance models, which resulted in properties with high concentrations of poverty. Also, because contracts were written for such long terms, appropriators had to provide large amounts of budget authority each time they funded a new contract. As the budget deficit grew, many Members of Congress became concerned with the high costs associated with Section 8 new construction and substantial rehabilitation, and these segments of the Section 8 program were repealed in the Housing and Urban-Rural Recovery Act of 1983 ( P.L. 98-181 ). The 1983 act also created a new, tenant-based housing voucher program, similar to the Section 8 existing certificate program. The Section 8 existing program was eventually replaced by the Section 8 Housing Choice Voucher program, which is the largest direct housing assistance program in use today.

Additional Uses of Section 8 Project-Based Rental Assistance

Several other forms of Section 8 project-based rental assistance, or uses for existing Section 8 project-based rental assistance, were developed following the 1974 act, several of which were targeted to properties that had been constructed with HUD-assisted financing through the Section 202, Section 221(d)(3)BMIR, and Section 236 programs.

HUD created the Section 8 Loan Management Set Aside (LMSA) initiative in 1976 as a way to reduce claims on HUD's FHA insurance fund and to reduce the rent burdens on low-income families. Financially troubled FHA-insured properties (including properties with Section 202 loans and Section 221(d)(3) and Section 236 insured financing) were eligible to apply to receive an allocation of Section 8 rental assistance for up to 100% of their units. This allowed tenants to pay income-based rents (up to 100% of FMR, or 120% with prior HUD permission). The federal government paid the difference between the tenant rents and a rent level necessary to help the property avoid a default and subsequent claim on the FHA fund. Rents could be adjusted annually, or more frequently at HUD's option. Adjustments were based on a written request of an owner or on an Annual Adjustment Factor (AAF). Owners would also be paid 80% of their rent for units vacant for up to 60 days. Section 8 contract terms under LMSA were initially five years, renewable in five-year increments. Congress stopped providing funding for LMSA in FY1994.

The Housing and Community Development Act of 1987 ( P.L. 100-242 ), as a part of broader preservation proposals, required HUD to provide Section 8 contracts in several additional circumstances. Title I required HUD to facilitate the sale to a third party of FHA-insured properties that HUD had acquired through foreclosure. These properties included those financed through the Section 221(d)(3) BMIR program and the Section 236 program. HUD met the requirement by providing rental-assistance contracts to purchasers through the Section 8 Property Disposition program. In 1995, HUD stopped entering into new Section 8 property disposition contracts and began using Section 8 tenant-based vouchers once properties were sold.

Title II of the Housing and Community Development Act authorized the provision of new Section 8 contracts as a part of preservation transactions. Under the Housing Preservation Program , HUD entered into project-based Section 8 contracts with owners of HUD-assisted multifamily properties (including Section 221(d)(3) and Section 236 insured mortgages) at risk of leaving the affordable housing stock as an incentive to owners keep their properties affordable. The program ran from 1987 to 1996; in 1997, Congress discontinued the use of these contracts as a cost-saving measure and the program was terminated in 1998.

Current Status

While HUD does not have authority to enter into new Section 8 project-based rental-assistance contracts, there are roughly 1.2 million Section 8 project-based units still under contract. Of those units, about two-thirds were subsidized through the new construction, substantial rehabilitation, and moderate rehabilitation versions of Section 8. About a quarter were subsidized through the LMSA version, and about half the remaining units were subsidized through the property disposition and preservation versions.

The Annual Contributions Contracts between owners and HUD describe how many units in an owner's property are subsidized, as well as how the rent level was set and how rent is to be adjusted. Owners are required to maintain their properties according to HUD-set quality standards, and are required, generally, to contribute to a replacement reserve account. For the most part, HUD has contracted with third parties, referred to as Performance-Based Contract Administrators (PBCAs), to manage Section 8 project-based contracts.

As discussed later in this report (" Mark-to-Market and Section 8 Renewal "), when project-based Section 8 contracts expire, the owner can choose to either renew the contract with HUD or leave the program and charge market rents for units. When an owner ends a HAP contract with HUD, the tenants in the building are provided with vouchers designed to allow them to stay in their unit. (See " Implications for Tenants " later in this report.)

How Affordability Restrictions Come to an End

A variety of circumstances may lead owners to stop providing affordable housing and leave HUD subsidized housing programs. In high-rent areas, owners may decide to pay off their assisted mortgages or choose not to renew a Section 8 rental-assistance contract in order to convert a property to market-rate housing or to sell the building at a profit. In cases where a property has been allowed to deteriorate significantly or the owner has violated the HUD program rules in other ways, HUD may choose to end a contract with an owner. This section details these possibilities.

Financing Assistance: Mortgage Prepayment and Maturation

The federal affordability restrictions on assisted housing come to an end when owners prepay their mortgages (if prepayment is an option), when the mortgages mature, or if HUD chooses to terminate its contract with a housing provider. The circumstances under which affordability restrictions may come to an end depend on the program under which the property was developed.

Section 236 and Section 221(d)(3) BMIR

Section 236 and Section 221(d)(3) program contracts can come to an end through both mortgage prepayment and mortgage maturation. In both programs, the initial term of the affordability restrictions was to be 40 years, the same as the duration of the mortgages. However, in order to attract property owners to the programs, HUD inserted clauses in many mortgage contracts allowing owners to prepay their mortgages after 20 years without HUD approval. The ability to prepay is limited to for-profit owners; units owned by for-profit owners made up about 62% of the total Section 236 housing stock and 59% of the total Section 221(d)(3) BMIR inventory. Because Section 221(d)(3) and Section 236 properties were funded prior to 1974, owners became eligible to prepay by the mid-1990s.

An owner's ability to prepay is also dependent on whether there is a rental-assistance contract attached to all or a portion of the units. Owners with no rental-assistance contracts can prepay the mortgage, at which point tenants receive enhanced Section 8 vouchers that allow them to either stay in their units or move elsewhere. (For more information about enhanced vouchers, see the " Implications for Tenants " section of this report.) Owners with Rent Supplement contracts cannot prepay their mortgages. For owners with Section 8 contracts, rental-assistance payments are to continue through the contract term, at which point the owner can opt out of the Section 8 program. At that point, income-eligible tenants receive enhanced Section 8 vouchers. According to HUD, between 1998 and 2004 approximately 1,409 Section 236 and Section 221(d)(3) BMIR property owners prepaid their mortgages.

Section 236 and Section 221(d)(3) owners also can choose to convert units to market-rate housing at the end of the 40-year mortgage term. At that point, if any Rent Supplement contract is still in place, it will be terminated. Section 8 contracts continue until their expiration, at which point tenants receive enhanced vouchers. If units are not rent assisted, then tenants do not receive Section 8 vouchers upon mortgage maturation.

Section 202 Loan Program

Although Section 202 owners may prepay their loans under certain circumstances, in general, prepayment does not result in the end of affordability restrictions. As part of an FY1984 supplemental appropriations act ( P.L. 98-181 ), Section 202 owners were given the option of prepaying their loans with HUD permission. However, under the law's provisions, owners are required to continue to operate the property through the date of the original loan under terms at least as advantageous to tenants as those under the original loan. The American Homeownership and Economic Opportunity Act of 2000 ( P.L. 106-569 ) added that, if there is a rental-assistance contract in place, the property owner must continue to operate under the terms required by the rental-assistance contract through loan maturity. Then, in 2010 the Section 202 Supportive Housing for the Elderly Act ( S. 118 ) provided that HUD would approve prepayment of existing Section 202 loans if owners agreed to maintain affordability under the terms of the original loan or existing project-based rental assistance contract for 20 years beyond the date of the original loan's maturation.

While most Section 202 owners may only prepay their loans with HUD permission, there is an exception for some properties that were financed between 1977 and 1982 where owners had written into the contract the right to prepay their loans without permission from HUD. However, because most Section 202 units financed during this time period also received Section 8 assistance, prepayment does not necessarily mean an end to tenant assistance because Section 8 rental-assistance contracts continue in place until contract expiration. If units have Rent Supplement contracts, those contracts terminate at the time of prepayment and tenants receive regular Section 8 vouchers. If owners with the right to prepay without notice choose instead to follow HUD guidelines and give notice of intent to prepay, then the Rent Supplement and Section 8 contracts continue in place.

Section 202 units may also convert to market-rate housing when the loans reach the end of the 40- or 50-year maturation period. As with the Section 236 and Section 221(d)(3) programs, if any Rent Supplement contract is in place, it will be terminated at the end of the loan. Section 8 contracts continue until their expiration, at which point tenants receive enhanced vouchers if owners choose not to renew. If units are not rent assisted, then tenants do not receive Section 8 vouchers upon mortgage maturation.

Rental Assistance: Expiring Rental-Assistance Contracts

Section 8

When Section 8 project-based housing assistance payment (HAP) contracts expire, the property owner can, generally, either renew the contract with HUD or leave the program. If the owner chooses not to renew the contract, and faces no further restrictions on the property, the owner can choose to charge whatever rent the market will bear, or sell or convert the property to another use. As discussed later in this report, a number of factors can influence a property owner's decision to either stay in the Section 8 program or to leave, such as the state of the housing market, other available options, and the mission/profit orientation of the owner. However, if the property is in poor condition, then the owner may not have the option to renew the contract, as HUD may choose not to renew.

When a HAP contract with HUD ends, the tenants in the building are provided with some form of voucher designed to either allow them to stay in their unit or move to a new home.

According to a HUD analysis, from 1998-2004, owners of over 11,000 properties (nearly 800,000 units) chose to renew their Section 8 contracts and owners of 1,363 properties (nearly 80,000 units) chose to opt-out of their Section 8 contract. Another 1,367 properties (almost 110,000 units) had been foreclosed upon or enforcement action had been taken.

RAP and Rent Supplement

Unlike Section 8 project-based rental assistance, HUD has no authority to renew RAP and Rent Supplement contracts when they expire. These contracts generally expire at the same time that the assisted mortgages mature. Upon expiration, tenants being assisted under RAP contracts are not eligible for tenant protection vouchers; tenants being assisted under Rent Supplement contracts are eligible for tenant protection vouchers, and in some cases, enhanced vouchers.

Troubled Properties

Another way that properties can leave the assisted housing stock is when HUD chooses to sever the contract with a troubled property or through an owner's default on an FHA-insured mortgage or HUD loan. HUD regularly assesses both the physical and financial health of the multifamily insured and assisted housing stock through its Real Estate Assessment Center (REAC).

As a condition of receiving mortgage assistance, rental assistance, or both, property owners agree to maintain their properties according to both local building codes and HUD's Uniform Physical Condition Standards (UPCS). If owners fail to maintain their properties, HUD can find them in default of their contracts.

Properties are periodically inspected to ensure that they comply with the UPCS. Based on the findings of those inspections, each property is assigned a numeric score. Any score below 60 is considered at risk, and these properties are referred to the Departmental Enforcement Center (DEC). Once a property has been referred to the DEC, the owner meets with the DEC staff and then has 60 days to make repairs necessary to raise the score above the failing point. If the owner cannot or will not repair the property within 60 days, then HUD will find the property in default of its assistance contract. When a property defaults on its contract, HUD has a number of options. In the case of a project-based rental-assistance property, HUD can choose to abate, or end, the Section 8 contract and issue vouchers to the tenants. In the case of a property with an assisted mortgage, HUD can choose to pursue foreclosure of the property and take ownership. HUD can also encourage the owner to pursue a transfer of the property to another owner. Federal regulations give HUD broad flexibility to use its discretion in these cases.

According to HUD's FY2009 Performance and Accountability Report, 93.3% of privately owned, HUD-insured properties met HUD's physical condition standards in FY2009. While the majority of the stock passed inspection, some units among those that failed were found to have multiple exigent health and safety concerns.

HUD can also choose to take action against a property owner for financial reasons. All owners of HUD-insured, HUD-held, and assisted properties must submit annual financial statement and audit information to REAC. REAC reviews the statements to determine the financial health of properties in their various portfolios, protect the Department from financial loss (through claims on the FHA insurance fund), ensure proper use of revenues and federal subsidies, and assess owner compliance with Business Agreements (e.g., use restrictions, Housing Assistance Payment Contracts, etc.).

If an owner is found to be improperly managing its federal funds in the program, then HUD can find the owner in default of the assistance contract and take action against the owner. That action could include financial penalties, but could also lead HUD to terminate the assistance contract. Again, HUD has broad discretion in determining how to handle properties with financial irregularities. According to HUD's FY2009 Performance and Accountability Report, 98.6% of multifamily assisted and/or insured properties had no compliance issues or audit findings, or had any such issues or findings resolved by the end of the fiscal year.

From 1998 through 2004, according to HUD, 2,385 properties with 182,945 units had left the assisted housing stock as a result of HUD enforcement action or foreclosure.

Implications for Tenants

In some cases, when an affordability restriction on a HUD-assisted property ends, low-income tenants may receive a rent subsidy to help protect them from rent increases or allow them to move to a new unit and pay an affordable rent. These rent subsidies are provided in the form of Section 8 Housing Choice Vouchers. Families receiving Section 8 vouchers generally pay 30% of their income toward their rent for the unit of their choice in the private market, and HUD makes up the difference between the tenant's payment and rent for the unit. Vouchers are portable, which means if a family chooses to move, they can take their voucher subsidy with them.

When vouchers are provided to families who are losing other forms of HUD-assisted housing (such as when affordability restrictions end), they are referred to as tenant protection vouchers. One difference between tenant protection vouchers and regular Section 8 vouchers is that families who receive tenant protection vouchers must pay at least as much rent as they were paying under their previous assistance program, even if it exceeds 30% of their income. Some tenant protection vouchers, called enhanced vouchers, have special features that allow them to increase to values higher than normally allowed in the voucher program in order to allow families to remain in their units as rents increase.

Tenant protection vouchers are generally provided to families who are losing their assistance as a result of HUD enforcement and property disposition actions (through foreclosure or abatement of a Section 8 contract) and when certain Rent Supplement contracts end (where there is not also a Section 8 project-based contract in place).

Enhanced vouchers are generally provided to families who are losing their assistance because an owner decided to opt-out of renewing a project-based Section 8 rental-assistance contract. Enhanced vouchers are also provided to tenants in certain properties when owners prepay their assisted mortgages. Generally, tenants in properties with mortgages that can be prepaid without prior HUD approval are eligible to receive enhanced voucher assistance. When enhanced vouchers are issued following a prepayment, all eligible families receive a voucher, not just those who were receiving assistance prior to the prepayment. In order to be eligible, families must be low income, or have moderate incomes if they are elderly or disabled, or must live in a low-vacancy area. Enhanced vouchers lose their enhanced nature and convert to regular vouchers when and if a family moves from its original property.

In some cases, families do not receive tenant protection or enhanced vouchers when affordability agreements end. Families who live in properties where the affordability agreement would be terminated upon mortgage prepayment, and prior HUD approval to prepay is required, would not generally receive tenant protection or enhanced vouchers upon mortgage prepayment. The types of properties that fit this category include those with nonprofit owners, those with certain limited-dividend owners, and those with certain for-profit owners, including those with Rent Supplement contracts and those with other assistance. Additionally, families living in properties with maturing mortgages without Section 8 assistance and tenants with assistance through the old Rental Assistance Payment (RAP) program do not currently receive either tenant protection or enhanced vouchers.

Previous and Ongoing Efforts to Preserve Assisted Housing

By the mid-1980s, Congress and HUD had become concerned about the potential loss of hundreds of thousands of units of privately owned, assisted housing serving low-income families. Under the direction of Congress and HUD, a "National Housing Preservation Task Force" was convened. The Task Force's final report, issued in 1987, identified four primary threats to the inventory: expiration of rental-assistance contracts, maturation of secondary financing, an aging housing supply with limited incentives for owners to maintain properties, and owners becoming eligible to prepay. Of the more than 2 million units in the assisted housing inventory at the time, the Task Force identified 645,000 as being the most vulnerable to loss.

In response to these concerns about the loss of the assisted housing inventory, Congress enacted several laws that gave private owners of HUD-assisted housing incentives to maintain the affordability of their properties. One of these laws, the Multifamily Assisted Housing Reform and Accountability Act ( P.L. 105-65 ) is currently in effect and addresses the renewal of Section 8 contracts between HUD and property owners. Two other laws, neither of which are currently in effect, addressed mortgage prepayments by private owners. These are the Emergency Low-Income Housing Preservation Act ( P.L. 100-242 ) and the Low-Income Housing Preservation and Resident Homeownership Act ( P.L. 101-625 ). While these laws are no longer in effect, the properties that went through their preservation processes are still governed by the agreements that were established at the time. This section describes these laws and their current status.

Financing Assistance

Emergency Low-Income Housing Preservation Act (ELIHPA)101

Congress initially attempted to address mortgage prepayments and the loss of affordable housing units by enacting Title II of the Housing and Community Development Act of 1987 ( P.L. 100-242 ), the Emergency Low-Income Housing Preservation Act (ELIHPA). The law prevented owners from prepaying their mortgages in many circumstances, and was described by some as a moratorium on mortgage prepayment. ELIHPA was designed to be a temporary measure, and intended to give Congress time to develop a permanent plan for addressing prepayments.

The ELIHPA restrictions applied to owners of properties insured under the Section 236 program, to owners of Section 221(d)(3) market rate properties that also received rental assistance through Section 8 or the Rent Supplement program, owners of Section 221(d)(3) BMIR projects, and those properties held by the HUD Secretary and formerly insured under one of these programs. The law required owners to obtain HUD approval prior to prepayment, even in cases where the mortgage contract allowed prepayment without HUD approval. Owners that wished to prepay their mortgages were required to submit to HUD a notice of intent to prepay, together with a plan explaining their proposed changes to the mortgage, the low-income affordability restrictions, and ownership of the building. The plan was also to include an assessment of how prepayment and other actions would affect existing tenants and how they would affect the general availability of affordable housing in the community.

HUD was to allow the prepayment of the mortgage, along with the termination of affordability restrictions, only if certain conditions were met.

In cases where comparable affordable housing was not available for current tenants, the plan could not, without good cause, "materially increase economic hardship" or displace current tenants who wanted to stay. The prepayment could not affect the supply of decent, safe, and sanitary housing that was affordable for low- and very low-income families in the area, the ability of families to find housing near employment, or the housing opportunities for minorities in the community. Alternatively (if a plan did not meet this requirement), a state and local jurisdiction could approve the plan as being in accordance with the state plan developed pursuant to ELIHPA.

For owners who wanted to maintain affordability or could not meet prepayment requirements, ELIHPA gave HUD the authority to offer incentives to owners to maintain affordability. Among the incentives were an increase in the return that owners could receive on their investment; increased access to residual receipts accounts or project reserves; additional Section 8 assistance or increases in Section 8 rents for units with existing contracts; and capital improvement loans. Owners that accepted incentives agreed to continue providing affordable housing for the period of time covered by the original mortgage—generally an additional 20 years.

ELIHPA's provisions were originally slated to sunset two years after enactment (on February 5, 1990), however, the law was extended by Congress through November 1990, when it was superseded by the Low-Income Housing Preservation and Resident Homeownership Act (described below). However, owners that entered into preservation agreements with HUD under the terms of ELIHPA were bound by the terms of those agreements.

Low-Income Housing Preservation and Resident Homeownership Act (LIHPRHA)

In 1990, Title VI of the Cranston-Gonzalez National Affordable Housing Act ( P.L. 101-625 ), the Low-Income Housing Preservation and Resident Homeownership Act (LIHPRHA), replaced the temporary ELIHPA law with what was intended to be a permanent preservation program. The new program covered the same types of housing developments and, like ELIHPA, limited the occasions on which owners could prepay their mortgages and terminate affordability restrictions, and it also provided incentives for building owners to offer affordable housing. However, LIHPRHA differed from ELIHPA by providing owners with a third potential option: selling their properties to qualified purchasers under certain circumstances.

Regardless of the option an owner selected, LIHPRHA—similar to ELIHPA—instituted requirements that owners notify HUD, state or local governments, and residents of their intent. Both laws also developed tenant protections for residents whose properties were prepaid or (in the case of LIHPRHA) sold, in the form of Section 8 vouchers.

Option 1: Prepayment

LIHPRHA was similar to ELIHPA in limiting the ability of owners to prepay their mortgages and terminate affordability restrictions. As with ELIHPA, HUD could only permit owners to prepay if HUD determined that the prepayment would not materially increase economic hardship or displace current tenants without good cause, and would not affect the supply of housing for low-income and very low-income households, housing near employment, and housing for minorities. Owners wishing to prepay were required, as they were in ELIHPA, to file a notice of intent to prepay with HUD and to certify that the aforementioned conditions were met. If owners prepaid their mortgages, tenants could remain in the housing at the same rental rates for three years, and if tenants moved, the owners were responsible for paying half of the moving costs.

If owners did not meet these conditions for prepayment, one of three scenarios could occur. An owner could (1) maintain affordability, assisted by incentives from HUD, generally in the form of higher rents; (2) sell the property to a qualified purchaser who would maintain affordability; or (3) prepay the mortgage and convert units to market rate housing, though this was only allowed in a limited number of circumstances—such as when HUD approved a plan for preservation incentives but did not provide them or when no qualified purchaser could be found.

Option 2: Stay In

For owners that chose to stay in the program and maintain their properties as affordable housing—either because they were not permitted to prepay, or because they wanted to remain in the program—LIHPRHA modified the preservation incentives under ELIHPA. The ELIHPA preservation incentives included Section 8 rental assistance, rent increases paid by tenants, HUD-insured loans for equity take-outs, and grants and deferred-payment loans for capital improvements. Under LIHPRHA, some preservation incentives were expanded: the value of Section 8 rents increased to 120% of FMR (from 100% under ELIHPA), and families eligible to receive Section 8 assistance expanded to those at 80% of area median income (up from those at 50% under ELIHPA). However, LIHPRHA limited the amount of assistance that could be provided to a property in other ways. The amount of annual returns an owner could realize was limited to 8% of equity (from no specified limit under ELIHPA), access to residual receipts was limited (there were no restrictions under ELIHPA), and loan limits for owners who stayed in the program were reduced.

Option 3: Sale

LIHPRHA created a third option for property owners: sale to a qualified purchaser—a buyer that would maintain the affordability of the property. This option could occur in situations where owners were not permitted to prepay, where they were unable to receive sufficient preservation incentive funding to stay in, or where they wanted to sell their properties. Owners wishing to pursue this option were also required to submit a notice of intent to HUD.

There were a number of ways in which a sale could occur. (1) In the first six months, owners were required to attempt to find a "priority purchaser" that was either a resident council or community-based nonprofit organization that had the support of the majority of tenants. (2) If no buyer could be found during the first six-month period, during the subsequent six months the owner could sell to any priority purchaser, including nonprofits or state and local housing agencies. (3) If a priority purchaser could not be found, owners could sell to "qualified purchasers"—for-profit entities that agreed to continue providing affordable housing. (4) If an owner could not find a qualified purchaser after three additional months had elapsed, the owner could decide to stay in as the owner of the property and accept incentives, or the owner could sell the building and convert units to market rate rent.

In all sales, LIHPRHA authorized HUD to provide purchasers with rental incentives similar to those received by owners that retained the property.

The End of ELIHPA and LIHPRHA

By the mid-1990s, concern was growing among housing advocates, HUD, and Congress about the cost of HUD's preservation efforts. Under ELIHPA and LIHPRHA, 751 properties with more than 90,000 units had completed plans of action (POAs) and received preservation funding through FY1996. According to GAO testimony in 1995, the average cost to preserve a unit of housing was about $19,000, and a GAO survey of 40 properties found that HUD preservation funding exceeded the value of the properties in more than half of the cases.

In addition to concerns about cost, LIHPRHA presented legal issues. Some property owners contested the provisions of both ELIHPA and LIHPRHA, arguing both that the laws violated the contracts under which the owners had agreed to participate in the program, and that the laws constituted a taking of private property by the government. The lawsuits contesting ELIHPA and LIHPRHA have had varying outcomes. Some have been settled; according to HUD, three cases have been settled and payments of $35 million, $2 million, and $1.25 million have or will be made. Some cases have been decided in favor of owners and some cases continue to be litigated.

In the FY1996 HUD appropriations law, Congress reinstated the right of owners to prepay their mortgages without prior HUD permission, effectively overriding the central provision of LIHPRHA. In the FY1997 appropriations laws, Congress imposed caps on the amount of funding HUD could provide in preservation incentives for owners undergoing LIHPRHA preservation transactions. In FY1998, Congress stopped providing funding to HUD for preservation incentives to owners under LIHPRHA, effectively ending the LIHPRHA program.

IRP Decoupling

When Section 236 owners initially began prepaying their mortgages, the prepayment also brought an end to the interest reduction payments (IRPs). HUD paid IRPs to owners of Section 236 properties to ensure that the effective interest rate on the mortgage was 1%. However, as part of the FY2000 HUD Appropriations Act ( P.L. 106-74 ), Congress implemented a process known as "IRP decoupling," through which Section 236 owners may prepay their mortgages but continue to receive IRPs. Owners must agree to maintain the affordability of the property for five years beyond the time period in which they receive the IRPs. Owners may continue to receive IRPs either through the balance of the term of the original Section 236 mortgage or longer if the owner requests it; however, if the term of IRPs is lengthened, then the amount of each IRP is reduced.

Flexible Subsidy Program

By the late 1970s, some assisted housing properties were facing financial distress and risking default on their HUD-assisted financing. If the properties defaulted, the federal government would face financial losses through FHA as well as the loss of affordable housing units. In response, Congress created a new Operating Assistance for Troubled Multifamily Housing Properties program as part of the Housing and Community Development Amendments of 1978 ( P.L. 95-557 ). The program was designed to "restore or maintain the financial soundness, assist in the improvement of the management, and to maintain the low- to moderate-income character" of certain assisted multifamily housing properties. The assistance was later expanded to include loans for capital improvements. Initially, projects assisted under the Section 236 IRP program, the Section 221(d)(3) BMIR program, and the Rent Supplement program were eligible to receive the assistance. Later, Congress expanded eligibility to certain Section 8 properties (those that were converted from RAP or Rent Supplement) and Section 202 properties, among others. While the program was initially funded with appropriations, a revolving fund—the Flexible Subsidy Fund—was established later to provide assistance. This fund consisted of Section 236 excess residual receipts, as well as proceeds from loan repayments and interest.

HUD provided Flexible Subsidy assistance through two programs. The Operating Assistance Program (OAP) provided temporary funding to replenish project reserves, cover operating costs, and pay for limited physical improvements. The assistance was provided as a non-amortizing "contingent loan" that could be repaid with excess residual receipts or upon the sale of the property. The Capital Improvement Loan Program (CILP) provided assistance intended to cover the cost of major capital improvements that could not be accomplished with program reserves. The assistance was provided in the form of amortizing loans, generally with an interest rate of 6%. Properties that received Flexible Subsidy assistance were required to maintain affordability for the life of their original mortgage.

New obligation authority for Flexible Subsidy assistance was last provided in FY1995. According to HUD, the Flexible Subsidy program was no longer needed after Congress created the authority for assistance through the Multifamily Assisted Housing Reform and Accountability Act (described in the next section of this report).

Rental Assistance

Section 8 Expiring Contracts, Renewals, and the Multifamily Assisted Housing Reform and Accountability Act (MAHRA)

Both ELIHPA and LIHPRHA were primarily focused on the stock of housing eligible for mortgage prepayment; neither law addressed another threat to the assisted housing stock identified in the 1987 Preservation Task Force report: the cost of renewing project-based rental-assistance contracts. Most Section 8 contracts—which were originated between 1974 and 1983—had terms of 20 years and were funded with up-front appropriations. By the mid-1990s, the contracts had begun expiring. Renewing the contracts would require new budget authority, for which Congress would have to provide new appropriations. In a tight budget environment, there was a concern that the cost of renewing Section 8 contracts could take up an expanding share of the HUD budget, leading to less funding for other priorities. Not renewing the contracts would save money, but it would mean that low-income families would lose their housing assistance. Further complicating matters, many of these properties were FHA-insured and many were receiving above-market rents. If the owners faced a drop in rent as a result of the loss of assistance, they could end up in default on their loans and the federal government—through the FHA insurance fund—would face a financial loss. Congress also discovered that many of these FHA-insured and rent-assisted properties were financially or physically distressed, including a number that were being mismanaged.

The policy problem facing Congress was how to restructure the program in a way that would be beneficial to the families living in these properties, cost-saving for the federal government, and attractive to project owners. Ultimately, Congress designed a restructuring program that reduced the federal subsidies to owners of properties insured by FHA, lowered the above-market rents payable to these owners, and restructured the mortgages of properties so that owners could operate effectively on less income.

This restructuring plan—referred to as Mark-to-Market—was created by the Multifamily Assisted Housing Reform and Affordability Act. It was passed by Congress as Title V of the VA-HUD Appropriations Act for FY1998 ( P.L. 105-65 ). The act was signed into law on October 27, 1997, and it expired on September 30, 2001. The program was reauthorized through a series of continuing resolutions until January 10, 2002, when it was amended and reauthorized through FY2006 under Title VI of the Labor, Health and Human Services, Education, and Related Agencies Appropriations Act for FY2002 ( P.L. 107-116 ). Section 21043 of the Revised Continuing Appropriations Resolution, 2007 ( P.L. 110-5 ) extended the authorization through October 1, 2011.

Mark-to-Market and Section 8 Renewal

Ultimately, at the end of a Section 8 contract an owner has two options: renew the contract, or opt out of renewing the contract. Under the terms of MAHRA, as implemented by HUD, owners wishing to renew their Section 8 contracts face different renewal procedures depending on the circumstances of the property. Those circumstances include the original subsidy type, the type of property owner, the property's rents relative to market, and the financial state of the property. The owner generally has six options: renew at existing rents (if rents are at market), be referred for renewal through a full Mark-to-Market restructuring (if rents are above market), renew at higher rents (if rents are below market), renew subject to special rules (if exempted from restructuring), renew based on terms of earlier preservation initiatives, or opt-out of the program by not renewing. These processes are detailed in the Section 8 Renewal Policy Guidebook, and are generally summarized below.

Mark-to-Market

The Mark-to-Market restructuring process is targeted to FHA-insured properties owned by for-profit owners receiving above-market rents. Owners of such properties with contracts up for renewal are referred to the Office of Affordable Housing Programs at HUD to be evaluated for Mark-to-Market eligibility. The Mark-to-Market process is designed to reduce rents to market rates. Owners participating in Mark-to-Market have two options: they can either accept the reduced rents and renew for a one-year term (referred to as Mark-to-Market "lite"); or they can accept the reduced rents and have their outstanding debt restructured (referred to as "full").

In a Mark-to-Market full restructuring, the owner's debt and income is renegotiated so that the income the owner receives is sufficient to cover rehabilitation needs, operating expenses, and reserve replenishment. This is accomplished through a full or partial payment of claim from the FHA insurance fund. The lower mortgage debt level can then be supported with lower rents. Mark-to-Market full renewals are subject to 30-year affordability restrictions, meaning that the owner must commit to maintain the property under a project-based contract (subject to the availability of appropriations) for 30 years. Owners undergoing a Mark-to-Market "lite" transaction are not subject to long-term affordability agreements. The new rents are adjusted each year using Annual Adjustment Factors (AAFs) published by HUD.

According to HUD, as of January 21, 2010, over 2,000 Section 8 properties had gone through full Mark-to-Market mortgage restructurings, and almost 800 properties had been through Market-to-Market "lite" transactions.

Mark-up-to-Market

Mark-up-to-Market was created in 1999 to provide an incentive for owners of below-market properties in strong markets to renew their contracts at market-comparable rents. In order to be eligible, properties must be owned by for-profit or limited-distribution owners, they must be in good physical condition, and if the property has an affordability restriction, the owner must be able to terminate it without prior HUD permission. In exchange for higher rents, owners that choose to go through Mark-up-to-Market renewals must agree to contract terms of at least five years. During that time, rents are adjusted each year using HUD's published AAFs.

Exception Projects

Some properties are not eligible for Mark-to-Market or Mark-up-to-Market, even if their rents are above or below market. These properties include properties that are owned by nonprofits, that were financed with state or local funding in lieu of FHA mortgage insurance, that have Section 202 or rural housing loans (unless it was refinanced with an FHA-insured mortgage), that participate in the Section 8 Moderate Rehabilitation Single Room Occupancy program, or that otherwise do not have an FHA-insured mortgage.

Exception projects are renewed at rents that are the lesser of current rents plus the local Operating Cost Adjustment Factors (OCAFs) established by HUD, or the rent level needed to meet operating expenses. If the owner signs a multiyear contract, the rents can be set either via OCAF or based on the needs of their budget (referred to as budget-based rent increases).

Other Renewals

Some properties have rents at market levels or have rents below market but the owners choose not to participate in Mark-up-to-Market. In these cases, owners can submit a Rent Comparability Study (RCS) and have their rents renewed at their current level, plus an OCAF adjustment or a budget-based rent increase. Unlike in Mark-up-to-Market cases, owners renewing under this option are not required to commit to five-year renewals or use agreements.

Opt Out

If an owner chooses not to renew an expiring Section 8 contract, he or she is considered to be "opting-out." Owners who opt out are subject to federal notification requirements and must notify tenants and HUD at least one year before the end of the contract of their intention to renew or not renew. Then, four months before contract termination, owners must formally notify HUD in writing if they are going to renew or opt out.

As noted earlier, tenants living in properties whose owners "opt out" are eligible for enhanced vouchers (see " Implications for Tenants " earlier in this report). Enhanced vouchers are tenant-based Section 8 vouchers with special attributes. Their values can increase to the gross rent for the unit, as long as it is reasonable, even if it exceeds local standards. Families must continue to contribute at least as much toward rent as they were before they received their voucher, even if it was above 30% of their income. And tenants who receive enhanced vouchers have the right to remain in their units as long as the units continue to be offered as rental housing, and as long as the tenants are in compliance with their leases (and state and local law).

Recent Initiatives: Contract Preservation Provisions and Green Retrofit Funding

Contract Preservation Provisions

In recent years, Congress has adopted two new preservation policies through the annual appropriations process, beginning with the FY2006 HUD appropriations law ( P.L. 109-115 ). The first addresses HUD's treatment of HUD-owned or managed properties with Section 8 project-based rental assistance contracts. Section 311 of P.L. 109-115 required HUD, to the extent feasible, to maintain Section 8 project-based rental assistance contracts when managing or disposing of multifamily properties owned or held by the Secretary as a result of foreclosure. Prior practice had often been to terminate Section 8 project-based contracts and replace the assistance with vouchers. In cases where the Secretary determined that continued rental assistance payments for the existing property were not feasible, the provision permitted HUD to transfer the rental assistance to another multifamily property or replace it with vouchers.

The second policy permits HUD to approve the transfer of rental assistance contracts and use restrictions from one property to another under certain circumstances. Section 318 of P.L. 109-115 authorized the Secretary to approve the transfer of mortgage debt, project-based rental assistance, and use restrictions from one HUD-assisted multifamily housing property to another property in cases where the transferring property is either physically obsolete or economically nonviable. In order to approve the transfer, among other requirements, the receiving project must exceed physical standards and the Secretary must determine that the transfer is in the best interests of the tenants.

Because these authorities were provided through an appropriations act, they expire at the end of the fiscal year unless they are renewed. The FY2007 year-long continuing resolution ( P.L. 110-5 ) extended the two preservation-related provisions through FY2007, and the FY2008 appropriations law ( P.L. 110-161 , Sections 220 and 215) made changes to the transfer authority and extended both provisions through the end of FY2008. The authorities have subsequently been extended in FY2009 and FY2010. According to HUD, as of March 2010, the transfer authority has been used less than a dozen times since it was created in 2006.

Green Retrofit Program for Multifamily Housing

The American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5 ) provided $250 million to fund retrofit investments in HUD-assisted multifamily properties that will reduce ongoing utility consumption, benefit resident health, and/or benefit the environment. HUD used the funding to create the Green Retrofit Program (GRP). Through GRP, HUD provided competitive grants and loans to owners of properties assisted through the Section 8 project-based rental assistance program, as well as the Section 202 and 811 programs. Owners receiving GRP funds are required to extend their affordability agreements for an additional 15 years.

"At Risk" Properties

Discussions around the issue of affordable housing preservation assume that properties are at risk of being lost to the affordable housing stock, whether through mortgage prepayment, expiring contracts, or the financial or physical health of the property, unless there is some kind of intervention. However, not all properties present the same level or type of risk, and situations vary based on numerous factors, including existing subsidy structures, the condition of the property, the type of ownership, and the property location.

For example, some assisted properties may not be at risk of being lost to the affordable housing stock at all. Mission-oriented owners of properties in good financial and physical condition may be likely to extend affordability agreements and may have little motivation to convert their properties to another use. In other cases, assisted properties may not be immediately at risk, but they may be in the future. For example, some properties have owners who would like to use the property for other purposes, but they are bound by extended affordability agreements. Other owners may wish to leave the affordable housing business, but cannot find a purchaser willing to pay the asking price for the property or commit to the long-term affordability agreements. Other owners may wish to sell, but they face economic disincentives, such as large capital gains taxes.

Some properties are more immediately at risk. Where properties face financial or physical distress, the owner may wish to maintain the property as affordable housing, but the income and subsidy structure may render the property unsustainable. And some properties are at risk because the owners have other, more desirable options at the end of their affordability restrictions. For example, a for-profit owner may have the option to profit from higher rents at the end of the affordability restriction. Or a mission-oriented owner, such as a church, may decide that it would rather use its property for another mission-related purpose, such as a school or other facility, at the end of the affordability restriction.

In these various circumstances, different interventions may be necessary to preserve the properties as affordable housing, and those interventions could be costly. Given limits to federal resources, priorities may need to be established when determining whether and how to preserve affordable housing. The next section of the report discusses some of these priorities.

Preservation Priorities

An initial question in discussing preservation is whether the government should intervene to maintain federally assisted housing beyond its original contract term at all. The modes of subsidy that led to the creation of these properties—subsidized multifamily mortgages and project-based rental-assistance contracts—have been replaced with different models of assistance, such as the Section 8 tenant-based voucher program and the Low-Income Housing Tax Credit. The original HUD subsidy programs were ended, in part, because of their perceived limitations, particularly their high costs and concerns that they concentrated poverty.

Today, Section 8 housing vouchers have become the primary form of deeply targeted housing assistance; there have even been proposals to replace the stock of federally assisted housing with vouchers. Vouchers are considered less expensive than project-based assistance and provide families with mobility and housing choices. However, the voucher program has its limitations. Landlords are not required to accept vouchers, and for some populations, especially persons who are elderly or have disabilities, accessible housing may not be available in the private market.

These critiques of the voucher program are used to support calls for the preservation and development of project-based housing assistance. With few exceptions, no statutory authority exists to create new, deeply targeted HUD-assisted housing. The Low-Income Housing Tax Credit, and, to a lesser degree, the HOME Investment Partnerships Block Grant program, help to fund the creation of new affordable housing developments; however, they are not as deeply subsidized as the older, HUD rent-assisted properties. Given the limited funding and authority for developing new, deeply subsidized housing, the stock of federally assisted housing is currently irreplaceable. Further, in many cases, it would be more expensive to build new housing than it would be to preserve the existing stock.

As evidenced by the history of federal housing preservation policy discussed earlier in this report, Congress and the federal government have generally taken the position that preserving assisted housing is a desirable federal housing policy goal.

However, even if it is less expensive than new construction, preservation can be costly. Many properties were built in the 1960s and 1970s and may be in need of repair in order to be habitable for an additional 20 to 40 years. As a result, funds are often needed for rehabilitation and improvements, possibly requiring federal grants or insured loans. Another cost could be funds for ongoing or new rental assistance. In cases where units already receive rental assistance (principally through Section 8), continued rental assistance is needed to maintain affordability for low-income tenants. In addition, some currently unassisted units may need rental assistance to help pay for increased operating costs after rehabilitation has occurred. A third possible cost may be providing incentives to owners to encourage them to maintain affordability or to sell to a purchaser who will.

In addition to the costs of preservation, a transaction may require the cooperation of multiple parties—building owners, tenants, the local community, and HUD—each of whom could have their own interest in whether and how a property is preserved. In addition, each property may have characteristics that make its preservation more or less costly and feasible. These characteristics can include the property location, its physical condition, the needs of the tenants, and the type of owner organization (nonprofit versus for-profit), together with the effectiveness of the owner. These factors, in turn, can create different options for owners, present the federal government with varying preservation costs, and affect community interest in maintaining the property as affordable housing.

This section of the report discusses several of the factors that may play a part in the decision to preserve federally assisted housing: property location, property condition, tenant needs, and type of owner. Given the reality of limited federal resources, HUD and Congress may have to weigh competing priorities to determine which preservation strategies are the most cost effective and which properties should be preserved.

Location and Community

The location of a property can affect its value, both positively and negatively. A well-located property may have many potential benefits for tenants, making its preservation a priority. For example, some assisted housing properties are located in desirable areas near public transportation or other community assets such as parks, schools, shops, medical providers, and community and senior centers. Access to public transportation may make it easier for low-income families to find and maintain employment or for families with special needs (such as those that include persons who are elderly or have disabilities) to be able to live independently. An assisted property might also be the only affordable rental housing in an otherwise low-poverty neighborhood. If it were no longer available, families may be required to move from an area of economic opportunity to one of concentrated poverty. In rural areas, an assisted housing property might be the only affordable housing available, or perhaps even the only rental housing available. At the same time, however, owners of properties that are desirably located may have an incentive to convert the property to a more profitable use when affordability restrictions end, making it difficult for potentially displaced families to find comparable housing.

Conversely, other federally assisted properties are located in areas with high concentrations of poverty and crime and with limited access to reliable public transportation and other community amenities. These properties may serve to limit the opportunities of their tenants. Preserving well-located properties may be a higher priority than preserving properties in distressed areas with limited opportunities.

Physical Condition of the Property

The physical condition of an assisted property can also affect the feasibility of its preservation. Some properties have deteriorated to the point that they have difficulty passing annual housing quality inspections. It may be very expensive to repair these properties so that they can provide adequate housing for families. There can be many reasons that a property has fallen into physical disrepair, and those reasons may influence the cost and feasibility of its preservation.

Most physically distressed properties are also financially distressed. They have operating income that is low or negative, leading to underinvestment in routine maintenance and replacement reserves. These properties may be financially distressed because they were not designed in ways that would allow them to succeed. For example, demand for efficiency units is low, making it hard for properties featuring only efficiency units to compete with other properties, even in a subsidized market. If a property's units are not desirable or well matched to demand in the surrounding community, it could have occupancy problems. High vacancy rates can lead to financial distress, which can ultimately lead to physical decline.

While some owners may be unwilling or unable to maintain properties, in some cases a property may be physically well designed and desirable, but the financing and/or subsidy structure has led to a financial imbalance. For example, many for-profit property owners took accelerated depreciation and mortgage interest tax deductions early in their property ownership. This allowed them to have strong and positive cash flow. But, over time, if the owner was unable to recapitalize the property (secure new funding for improvements), those deductions became unavailable, leaving the owner with insufficient income to cover operating expenses, replacement reserves, and tax liability later. This may be due to poor planning on the part of the owner, or to changing market conditions.

Whether or not a physically distressed property is worth preserving may depend on the level of deterioration, the overall relevance and desirability of the design of the property, and other factors.

Tenant Needs

The needs of a tenant population may make preservation a priority in some cases, principally in the case of elderly tenants and tenants with disabilities. When the alternative to preservation is providing tenants with Section 8 vouchers, tenants who are elderly or have a disability may have difficulty finding housing that meets their needs, particularly if their mobility is impaired. The difficulty of relocating, combined with potential accessibility features of HUD-assisted properties, could weigh in favor of preservation. In addition, some properties offer supportive services through a service coordinator or other means; if those properties are not preserved, tenants may not be able to find replacement housing where services are offered.

According to CRS analysis of resident characteristics data from HUD, about 62% of families living in HUD rent-assisted properties were elderly and/or disabled.

Type of Owner

The characteristics of property owners may affect their willingness or ability to maintain affordability after their contracts with HUD expire. Profit-motivated owners may be more likely to sell their property or convert it to market-rate housing than mission-driven, nonprofit organizations. In 2006, HUD released an analysis of properties that had left HUD programs, comparing their characteristics to those properties that remained part of the assisted housing stock. Of those owners that either prepaid their mortgages or opted out of Section 8 contracts, 86% were for-profit organizations (compared to 55% of total owners that were for-profit) while only 9% were nonprofits. HUD commented on the fact that nonprofit owners have been less likely to leave HUD-assisted housing: "many nonprofits are motivated by the goal of providing affordable housing to low-income people, and would not opt out even if they could leave the stock." Properties with for-profit owners may require more costly preservation incentives than those with nonprofit owners.

Another factor could be an owner's ability to operate and maintain the property. If an owner has not operated a property well or has allowed it to deteriorate, HUD may not be willing to continue subsidies or extend preservation incentives to the existing owner.

Weighing the Costs and Benefits of Preservation

Weighing the costs and benefits of preserving an assisted housing property can be difficult. This is due, at least in part, to the wide range of stakeholders in the property. For any given property, the stakeholders include the property owner, the tenants, the surrounding neighborhood, the state and local government, the federal government (specifically HUD), and, potentially, Members of Congress. These stakeholders may have different views about the relative costs and benefits of preserving the property.

Owners are generally focused on maximizing their financial investments, although nonprofit owners may have mission-oriented goals (which may or may not involve affordable housing). Residents' concerns could include preventing their own displacement or improving their own living environments; however, thoughts about the best way to achieve either goal could vary from resident to resident. Local community leaders, and local and/or state government officials, could see the property as a valuable community asset, or as a blight and a tax on local resources. Similarly, HUD may see the property as a high-performing federal asset, or as a low-performing risk to the FHA insurance fund. Some Members of Congress may consider it important to preserve existing subsidies due to limited authority to create new project-based housing, but other Members may see the cost of preservation as being too high given their desire to limit discretionary spending.

The heterogeneity of the assisted housing stock further complicates efforts to consider the costs and benefits of preservation. As outlined earlier, some properties are better located than others, some are in better physical conditions than others, some serve particularly vulnerable populations, and their owners have varying levels of commitment and capacity. The subsidy status of the properties also varies widely. Some have received relatively large amounts of federal funding over the years through rental-assistance contracts and subsidized mortgages; others have received much less, perhaps only an interest rate that was initially below market, but is now at or above market. These factors influence both the potential cost of preserving the property as well as the potential implications of not acting to preserve the property.

Ultimately, when it comes to assisted housing preservation, owners can choose what to do with their properties. However, these choices are constrained by federal, state, or local laws and may be influenced by the availability of preservation incentives. For example, as described earlier, property owners cannot terminate rental-assistance contracts without first providing at least one year's notification to tenants. This policy is designed to give tenants time to organize an attempt to launch a preservation effort, or to prepare for a change in their subsidy status. In terms of incentives, HUD has historically held the primary role in determining which properties have access to preservation incentives, although the agency may take into account the views of other stakeholders.

Property Characteristics

As noted earlier, there are several different types of assisted housing properties at issue in terms of preservation. Some have assisted financing (through FHA or the Section 202 loan program), some have rental-assistance contracts, and some have both. The level of affordability of the property, the length of time the affordability must be maintained, and the options at the end of the assistance contract all vary depending on the type of subsidy provided. This section of the report presents detailed characteristics of properties at issue in preservation, organized around types of assistance. The first section presents data regarding the Section 202 loan program, the second section covers the Section 236 and Section 221(d)(3) BMIR programs, and the third section presents data regarding units receiving rental assistance through the Rent Supplement, RAP, and Section 8 programs. Note that there may be some overlap among data presented in the three sections. For example, Table 1 includes Section 202 units that receive rental assistance; these units are also included in Table 7 , which shows all rent-assisted units. See Table A -1 in Appendix A for disaggregated units.

Section 202 Loans

As can be seen in Table 1 , there are 2,786 properties with active Section 202 loans. The majority of units in those properties receive rental assistance.

As noted earlier in this report, once a Section 202 loan matures, the affordability agreement between the owner and HUD generally ends, unless the property has a rent-assistance contract that is extended. As is shown in Table 2 , the majority of Section 202 properties have loans that will not mature until more than 15 years from now.

As discussed previously, HUD inspects properties annually, biannually, or every three years, depending on the property's most recent inspection score. Under HUD regulations, properties with scores below 30 are automatically referred to the Departmental Enforcement Center (DEC) for corrective action, and recently, HUD has adopted a policy that properties with scores above 30 but below 60 should also be referred, unless there are mitigating circumstances.

Properties in poor physical condition are at risk of default on their HUD assistance contracts and of being lost to the affordable housing stock. Less than 3% of properties with Section 202 loans have scores low enough to require referral to the Departmental Enforcement Center, and more than 60% have inspection scores high enough to require inspection only every three years.

Financing Assistance: Rent-Restricted, Insured Units

As shown in Table 4 , there are about 1,542 properties with mortgage insurance through the Section 236 and Section 221d(3) BMIR programs. As discussed earlier in this report, these mortgage insurance programs conferred affordability restrictions on the properties and their owners. The properties with active Section 236 or BMIR financing provide more than 170,000 units of housing subject to affordability restrictions; about 56% of those units also have rental assistance.

As discussed earlier in this report, upon maturation of Section 236 and BMIR insured loans, owners have the authority to convert their properties to market uses, including charging market-rate rents. Upon such a conversion, any units with rental assistance will continue to receive rent assistance under the terms of the rent-assistance contract while it is in effect. If the owner does not renew the rent-assistance contract, except in the case of units with Rent Supplement contracts, the residents will receive tenant protection vouchers, and in many cases, they will receive enhanced vouchers. Renters in unassisted properties are not eligible for tenant protection vouchers upon maturation under current law. As shown in Table 5 , most of these properties are facing mortgage maturation in the next five years, with about 57,835 units at risk of unassisted rent increases.

As shown in Table 6 , about 7% of FHA-insured, rent-restricted properties had inspection scores low enough to require referral to the Departmental Enforcement Center for corrective action. The highest percentage of properties (45.8%) have scores high enough to require inspections only every three years.

Rental Assistance

As shown in Table 7 , there are 17,207 properties that have rental-assistance contracts with HUD. Note that in a given property, it is possible that some units are not covered by a rental-assistance contract. In aggregate, of the more than 1.4 million units in the rent-assisted properties, 88% are covered by rental-assistance contracts. It is also possible that a property can have contracts for more than one type of rental assistance. Most rent-assisted properties have only Section 8 assistance; only about 2% of properties have only RAP assistance or Rent Supplement assistance. A small number of properties have a combination of the different types of rental assistance (for example, both a Section 8 and RAP contract). Not surprisingly, the percentage of units assisted in RAP-only and Rent Supplement-only properties is much lower than the percentage of units assisted in Section 8-only properties, since both the RAP and Rent Supplement programs had limits on the percentage of units that could be assisted in a property.

Including those units in properties with a mix of contracts, there are 15,870 RAP units, 12,847 Rent Supplement units, and 1.2 million Section 8 units. From a preservation standpoint, the type of assistance is important. HUD has no authority to renew RAP and Rent Supplement contracts, which assist nearly 30,000 units, and only has the authority to provide tenant protection vouchers upon contract termination to tenants in Rent Supplement units, not tenants in RAP units.

Table 8 provides information on the expiration period for rent-assistance contracts, broken down by type. As is shown in the table, most Rent Supplement expirations will happen within the next five years, whereas most RAP expirations will happen within the next 10 years. Under current law, these contracts cannot be renewed. Most Section 8 contracts will expire in the next five years. For the most part, owners can choose to renew Section 8 contracts if they wish.

As noted earlier in this report, the ownership type of a property can be indicative of the likelihood that the owner will choose to exit an assisted housing program. As shown in Table 9 , approximately 41% of properties with rental-assistance contracts are owned by nonprofit owners. Roughly 42% are owned by for-profit owners. Another 15% are owned by limited-dividend owners. Limited-dividend owners face caps on the return they can receive on their investment in a rent-assisted property. As a result, limited dividend may be the ownership type with the greatest incentive to leave the program, depending on other factors.

Another factor that can affect whether a property remains part of the assisted housing stock is the physical condition of the property. As can be seen in Table 10 , the majority of properties with rent-assistance contracts have high enough inspection scores to allow them to be inspected only every three years. However, 6% of properties, at their last inspection, had scores low enough to require corrective action.

Summary

As presented in these data (including the data presented in Table A -1 in Appendix A ), almost 17,700 properties containing more than 1.33 million subsidized units (with financing or rental assistance) have some form of federal affordability restrictions that are scheduled to end. In some cases, those agreements will be renewed and continued, in other cases, they will be terminated at the owner's choice, at HUD's choice, or because there is no authority to renew the agreements. Those in the latter category are the easiest to identify. Just under 29,000 units of housing are subsidized by RAP and Rent Supplement contracts that HUD has no authority to renew. More than 10,000 of those contracts will expire in the next five years. However, HUD does have authority to provide ongoing rental assistance, in the form of tenant protection vouchers, to those families living in units with expiring Rent Supplement contracts. These represent just under 13,000 total units, well over half of which will expire in the next five years. HUD does not have the authority to provide ongoing rental assistance to those families living in units with expiring RAP contracts; these represent more than 16,000 total units, of which just under 10% will expire in the next five years.

HUD also does not have any current tools to extend affordability agreements on properties with maturing HUD-assisted financing through the Section 202, Section 221(d)(3) BMIR, and Section 236 programs. While those properties with HUD-assisted financing together with Section 8 contracts can extend their federal affordability agreements through renewal of their Section 8 contracts, properties without Section 8 contracts do not have this option. There are 315 properties with FHA-insured loans through the Section 236 or Section 221(d)(3) BMIR programs containing over 31,000 units, and 176 properties with Section 202 loans containing just under 15,000 units that have no rental-assistance contracts. While some of these owners may not increase their rents to market rates once the affordability restrictions end, there is no federal law preventing them from doing so and there is no federal rent assistance available to the families living in these units if their rents increase.

For those properties that have the option to extend their affordability agreements, it can be difficult to determine what may happen at the end of their current agreements. Of the more than 1.2 million units with Section 8 assistance that can be renewed, over half have rental-assistance contracts that will expire over the next five years. As long as the property is not in default of its assistance contract (and, as shown in Table 10 , most properties have at least passing physical inspection scores), the owner can decide whether or not to renew the contract. Well over half of these rent-assisted properties are owned by for-profit entities, including the 15% owned by for-profit owners who receive "limited-dividends," or caps on their profits. While all for-profit owners may be at greater risk of opting-out of renewing their contracts than nonprofit owners, limited-dividend owners may be the most likely not to renew if they can receive comparable rents, and greater profits, in the private market.

Preservation Options

As described earlier in this report, the federal government has a limited set of preservation tools. HUD has the authority to renew expiring rental-assistance contracts for those properties that have them, and, in some circumstances, restructure the outstanding debt on a property if it has FHA-insured financing. In other circumstances, HUD has the authority to provide residents facing displacement with rental assistance. For properties with maturing mortgages, HUD has no preservation authority. Earlier preservation laws gave HUD additional tools, including the authority to provide new rental-assistance contracts, secondary financing to shore up troubled properties, and enhanced restrictions on property owners' rights to exit certain programs. These additional preservation tools are no longer available; they were eliminated out of concern about their high cost and about their infringement on property owners' rights.

In recent years, particularly as concern about maturing mortgages has grown, there have been calls from low-income housing advocates, tenants'-rights organizations, and property owners to adopt policies that encourage preservation and expand the set of preservation tools available to HUD. A number of proposals that would encourage housing preservation have been made as part of legislation or through recommendations from interested groups. These proposals generally fall into two broad categories: (1) incentives for current owners to maintain their properties or sell them to preservation purchasers, and (2) restrictions on owners.

It is important to note that federal efforts are not the only preservation efforts. In recent years, state and local governments, along with affordable housing preservation advocates, have increased the local role in affordable housing preservation. Several states and localities have set aside their own funds, or prioritized the use of their federal funds, for preservation incentives. For example, according to CRS analysis of 2008 state Low-Income Housing Tax Credit (LIHTC) Qualified Allocation Plans, 27 states awarded additional points to preservation projects in their competitions for tax credits, and an additional 17 states set aside a portion of tax credits for preservation purposes.

The following section of the report discusses current federal preservation policy options.

Financial Incentives for the Current Owner to Maintain Affordability

There are a number of methods through which the government could provide incentives for existing owners to maintain their properties as affordable housing. These options include reducing owner debt, increasing the amount of rent subsidies owners receive, allowing owners to access reserve funds, or providing funds to rehabilitate and improve properties. One consideration when offering incentives is what strings to attach to them. Generally, when owners have received preservation incentives in the past they have been required to extend any affordability restrictions (for between five and 30 years, depending on the incentive) and, in some cases, renew any expiring rental-assistance contracts. Incentive options include the following:

Debt reduction—Reducing owners' debt may reduce their operating costs, freeing up funds for needed repairs, or it may make it more feasible for owners to enter into new loans, the proceeds of which could be used to rehabilitate properties. HUD could be given explicit authority to subordinate or forgive loans that it made to property owners over the years. For example, HUD extended Flexible Subsidy loans to Section 236 and Section 202 owners, among others, to help "restore or maintain the financial or physical soundness of the project." If HUD waived this debt in the case of a refinancing, an owner would not have to use loan proceeds to pay off the debt and would have more funds available to improve the property. HUD could also be given authority to make partial payments of claim from the FHA insurance fund to reduce the debt of FHA-insured properties. HUD already has the authority to do this in certain circumstances; that authority is primarily used in Mark-to-Market transactions. Increased rents and/or rent assistance—If owners were to receive higher rents, they might be better able to pay for improvements to their properties or may be willing to continue to provide affordable housing. In the case of rent-assisted units, the federal government would likely pay the cost of increased rents. In the case of units without rent assistance, lower-income tenants could end up paying the cost of increased rents unless additional rent subsidies were provided. Access to reserves—Some property owners with rental-assistance contracts are required to establish residual receipt accounts. In some circumstances, HUD can permit owners to access these funds for reinvestment in the property. Expanding access to these reserves could give owners the incentive to maintain their properties as affordable housing. Loans or grants for recapitalization—HUD could make loans or grants directly to building owners to enable them to improve their properties. This has happened in the past through the Flexible Subsidy Program. Currently, HUD does not receive any funding for this purpose.

Incentives to Sell to Preservation Purchasers

Another method of preserving housing is to give owners incentives to sell their properties to organizations that will continue to maintain affordability for some period of time. This could occur with owners who no longer wish to participate as affordable housing providers or where owners are not considered "good" owners by the residents, the local community, and HUD. The potential buyers in this scenario are sometimes referred to as "preservation purchasers" and are often nonprofit organizations or state housing finance agencies, and, in some circumstances, organizations of residents. Incentives to sell to preservation purchasers could come in different forms:

Exit tax relief—Congress could enact a law to reduce the tax liability of owners that sell their properties to preservation purchasers. Some for-profit owners face large tax bills when they sell their assisted properties due to capital gains taxes. In cases where owners have held property for decades, capital gains taxes may be quite high and act as a disincentive for the owner to sell the property. Financial assistance for preservation purchasers—In some cases, potential preservation purchasers do not have the technical expertise or access to funding necessary to allow them to purchase a property. In order to aid preservation purchasers, federal funding could be used to provide technical assistance and/or pre-development grants that would aid preservation purchasers in putting together financing to purchase a property. Funding could also be provided for direct grants or loans to help preservation entities purchase and rehabilitate a property. Another option is to fund additional rental-assistance contracts, which can serve to both provide ongoing operating assistance and act as a credit enhancement when a purchaser is seeking private market financing.

Requirements for Current Owners

Another way to preserve affordable housing would be to impose requirements on property owners. Such requirements could include limiting an owner's options in selling the property, giving tenants the right to enforce existing housing quality standards, and expanding tenant notification requirements.

An advantage of owners requirements is that they can accomplish the goal of preservation without costly incentives. However, requirements that restrict an owner's ability to sell or convert a property to market-rate housing could result in legal challenges. As discussed earlier in this report (" Previous and Ongoing Efforts to Preserve Assisted Housing "), in the late 1980s and early 1990s Congress enacted laws designed to limit the ability of owners to end affordability restrictions. The laws resulted in years of litigation over whether these restrictions resulted in a constitutional "takings" claim. The federal government has lost several of these lawsuits and some are still pending. Owner requirement options include the following:

Right of first refusal or right of first purchase for preservation purchaser —One proposal is to give preservation purchasers a right to purchase properties in order to prevent them from being converted to market-rate housing. In this scenario, if an owner wanted to sell the property he or she would first have to attempt to sell the property to an organization that would maintain affordability, or would have to accept a fair market offer by a preservation purchaser over other offers. Right of first refusal or right of first purchase for tenants—Another option similar to the right of first purchase or right of first refusal for a preservation purchaser would be offering the same rights to tenants. The idea is that, with sufficient notification, tenants can get technical assistance, organize themselves, and purchase the property in which they live. Tenant enforcement of HUD contracts—A criticism preservation advocates have made of current policy is that tenants have no way to compel HUD to enforce its rules, such as those meant to ensure that properties do not deteriorate to the point that they fail inspection. It has been proposed that if tenants were given the standing to compel enforcement with contract rules, properties may be better maintained and may not be at risk of loss due to HUD enforcement action. This type of private right of action exists in fair housing law and would give tenants greater power in negotiation with private property owners. Tenant notification—In cases where owners plan to convert units to market-rate housing or sell the property to an owner that will not maintain affordability, they must notify tenants. Proposals have been made to expand these notification requirements; this would help resident groups organize in case they wish to purchase the property or contest a sale, or it would give them ample time to find alternative arrangements with their vouchers. Current law requires that owners give a minimum notification of at least 150 days before prepaying an FHA-insured mortgage and at least a one-year notice before choosing not to renew a Section 8 contract.

What if Property Is Not Preserved?

In some cases, a property either cannot be preserved with existing incentives, or should not be preserved, perhaps due to its physical condition or location. In circumstances where an individual property will not be preserved, there may be options to either transfer the assistance to another property or provide residents with ongoing assistance.

Transferring Section 8 assistance—If a property is significantly deteriorated, outdated, or poorly located, one preservation option is to transfer the assistance attached to the property (its rental-assistance contract and/or its affordability restriction) to another, better-suited property. The idea is to preserve the existing assistance, since there is no authority for new rental-assistance contracts or affordability restrictions. In recent years, Congress has given HUD limited authority to undertake these types of transfers, and there has been interest in further expanding that authority. Expanded Enhanced Voucher Eligibility—In the case of mortgage prepayment or termination of a Section 8 contract, the tenants receive vouchers in some circumstances. These vouchers are designed to provide ongoing rent assistance to tenants and to protect them from rent increases, which may allow them to remain in their current rental units. In the case of the expiration of RAP and Rent Supplement contracts, as well as in the case of mortgage maturation or HUD-approved prepayments (in the absence of rental-assistance contracts), the residents are not eligible for vouchers. There have been proposals to expand enhanced voucher eligibility to those groups that are not currently eligible. The FY2012 appropriations law ( P.L. 112-55 ) included funding for expanded eligibility for tenant protection and enhanced vouchers, specifically for certain properties with maturing mortgages, expiring RAP contracts, and expiring affordability restrictions under ELIHPA/LIHPRA.

HUD Initiatives and Legislation

In the 111 th Congress, one extensive preservation bill was introduced, the Housing Preservation and Tenant Protection Act ( H.R. 4868 ), and another was enacted, the Section 202 Supportive Housing for the Elderly Act ( P.L. 111-372 ). While comparable legislation has not been introduced in the 112 th Congress, HUD has issued several notices announcing policy changes that are designed to help owners rehabilitate and preserve existing properties. In addition, the Administration has proposed a Rental Assistance Demonstration that is meant, in part, to preserve Rental Assistance Payment (RAP) program and Rent Supplement-subsidized units. These initiatives, as well as legislation from the 111 th and 112 th Congresses, are described below.

Recent HUD Policies to Promote Preservation

HUD Notices

Toward the end of 2010, HUD began publishing notices regarding policy changes that enable multifamily property owners to make improvements to their housing developments. These policy changes are designed to preserve affordable units that would otherwise fall into disrepair.

One notice, published on December 20, 2010, gives HUD the discretion to subordinate Section 202 loans when owners have "immediate needs for rehabilitation, significant or emergency repairs," but are unable to go through the refinancing process to pay off the Section 202 loan. Owners must be able to show that the subordination is necessary in order to preserve the project, and must enter into extended use agreements for the longer of 20 years beyond the loan's original maturity date or the date on which the subordinated loan is repaid. Similarly, HUD issued a notice that gives it the authority to defer the repayment of flexible subsidy debt in circumstances that would assist in preserving properties. From the late 1970s to the mid-1990s, the flexible subsidy program provided loans to properties with HUD-assisted financing that were having financial difficulties (the last year in which Congress gave new obligation authority was FY1995). Under the terms of the notice, HUD may approve deferral of payment in cases where an owner refinances a loan but the funds are not sufficient to pay off the flexible subsidy debt. As with subordination of Section 202 loans, an owner has to show that the deferral is necessary to ensure preservation of the project and must agree to an extended use agreement for the longer of 20 years beyond the flexible subsidy loan's original maturity date or the date on which the subordinated loan is repaid. Another HUD notice, issued on February 1, 2011, allows multifamily project owners to convert efficiency units to one-bedroom units, even if conversion results in fewer total units in the building. Owners may wish to pursue conversion because efficiency units are undesirable in some markets and owners are unable to rent them, resulting in lack of income to keep properties operational. In order to be able to convert units under the terms of the notice, owners must demonstrate that the local market demand is such that conversion is necessary and that it will put the property in a better financial position.

HUD's Proposed Rental Assistance Demonstration

As part of its FY2012 budget, HUD proposed a new Rental Assistance Demonstration (RAD) that would convert rental assistance provided through several rental assistance programs to a new form of Section 8 project-based rental assistance. Two of the programs would be Rent Supplement and RAP, which were discussed earlier in this report. Under current law, HUD does not have the authority to renew Rent Supplement and RAP contracts, so when the contracts expire, owners are no longer eligible to receive rental assistance for the previously subsidized units. While tenants living in units assisted through Rent Supplement may receive tenant-protection vouchers, those in RAP-assisted units are not eligible for vouchers. Under the proposed legislation, Rent Supplement and RAP assistance contracts could be voluntarily converted to this new form of Section 8 contracts, which would allow units to maintain their subsidies. In its budget, HUD requested authorizing language for the demonstration and $200 million to cover the expected cost of the conversions.

The FY2012 appropriations law ( P.L. 112-55 ) included a modified version of RAD, which limits participation to public housing properties and Section 8 Moderate Rehabilitation properties.

Recent Legislative Initiatives

The Housing Preservation and Tenant Protection Act (H.R. 4868, 111th Congress)

An extensive preservation bill, the Housing Preservation and Tenant Protection Act ( H.R. 4868 ) was introduced in the House on March 17, 2010, by the then-chairman of the House Financial Services Committee. The bill was similar to a draft preservation bill that had been circulated as part of a hearing held by the Subcommittee on Housing and Community Opportunity of the House Financial Services Committee in July 2009. The bill was marked up and approved by the House Financial Services Committee in July 2010; however, it was not considered on the House floor before the end of the 111 th Congress.

The bill included versions of most of the proposals discussed in the previous section of this report. Among others, the bill included the following provisions:

Regarding Section 221(d)(3) BMIR and Section 236 properties with maturing mortgages, H.R. 4868 would have authorized HUD to make grants or loans available to rehabilitate the property if owners so chose, and would have extended enhanced voucher protections to unassisted tenants upon mortgage maturation. The bill would also have created a "Preservation Exchange Program," through which HUD could facilitate the transfer of a property with a maturing mortgage to a preservation purchaser. The bill would have authorized HUD to provide incentives both to current owners and purchasers, including the forgiveness of outstanding Flexible Subsidy loans. H.R. 4868 would have authorized the conversion of RAP and Rent Supplement contracts to Section 8, which would have allowed them to be renewed and would have expanded certain owners' access to their residual receipts accounts. The bill would have established a form of right of first refusal/right of first purchase for HUD (or its assignee) whereby HUD could match the offer of a third party and purchase a HUD-assisted property in order to maintain its affordability. H.R. 4868 would have permitted owners to request project-based assistance in lieu of enhanced vouchers, and would have required HUD to provide such assistance, as long as the owner agreed to extend the contract at least 20 years. In terms of tenant protection and assistance, H.R. 4868 would have authorized funding for technical assistance for tenant organizations and given tenants a private right of action to enforce program rules. The bill also contained a version of the Section 202 preservation legislation (discussed in the next section of this report), as well as an authorization and modification to rural housing preservation initiatives that have been authorized and funded through recent appropriations acts.

The legislation would have authorized "such sums as necessary" to fund various preservation incentives, making it dependent on the Appropriations Committees to fund most of the new initiatives.

Both low-income housing advocates and industry organizations representing assisted property owners provided feedback on the draft legislation during the hearings in 2009. While many of the proposals contained in the draft legislation were supported by both advocates and owners groups, provisions related to restrictions on owners (right of first purchase/right of first refusal and private right of standing for residents) proved controversial, with tenant advocates in support of the provisions and owners groups opposed. Based on testimony given during a hearing on March 24, 2010, property owners continued to be concerned about the right of first refusal and private right of standing provisions and tenant advocates continued to support such provisions in the introduced version of the bill.

The Section 202 Supportive Housing for the Elderly Act (P.L. 111-372)

At the end of 2010, Congress passed the Section 202 Supportive Housing for the Elderly Act ( P.L. 111-372 ), a law that gives owners of older Section 202 developments the ability to refinance, improve, and potentially preserve their properties, and that also extends the term of affordability in cases of refinancing. The law allows owners of older Section 202 developments (those financed with low interest rate loans) to refinance without the requirement of a lower interest rate and reduced debt service, as had previously been the case. In addition, P.L. 111-372 extended the term of affordability to 20 years beyond the term of the original Section 202 loan. Previously, owners who refinanced were required to maintain affordability only through the term of the original Section 202 loan. Another change to existing law contained in P.L. 111-372 is a new "preservation project rental assistance" program, which is to be available to owners who refinance their Section 202 loans in order to prevent displacement of tenants. Not all Section 202 units receive rental assistance, particularly those financed prior to 1974, and if owners have to increase rents due to increased debt service, the rental assistance may prevent displacement of tenants.

For more information about P.L. 111-372 , see CRS Report RL33508, Section 202 and Other HUD Rental Housing Programs for Low-Income Elderly Residents , by [author name scrubbed].

Preservation Provisions in FY2012 HUD Appropriations Law

The FY2012 HUD appropriations law ( P.L. 112-55 ) contained several preservation-related provisions. As noted earlier, the law authorized a modified version of the President's RAD initiative, which will be available to Section 8 Moderate Rehabilitation properties. Further, the law funds tenant protection vouchers for residents of some properties with maturing mortgages, expiring RAP contracts, or expiring ELIHPA/LIHPRHA use restrictions. It also authorizes the conversion of tenant protection vouchers to project-based vouchers for some residents in RAP and Rent Supplement properties, permits HUD to extend for one year expiring RAP and Rent Supplement contracts, and extends the authority for the Mark-to-Market program through October 1, 2015. Finally, the law continued provisions from previous years requiring HUD to maintain project-based assistance contracts on HUD-held properties and permitting the transfer of project-based assistance contracts between properties.

Appendix A. Preservation Properties at a Glance

Appendix B. Glossary