The Housing and Community Development Act of 1974, a major overhaul of housing laws, created the tenant-based and project-based Section 8 rental assistance programs for low-income households. The tenant-based program (now called Housing Choice Vouchers) provides rental assistance to eligible households to rent houses or apartments in the private market from landlords who are willing to accept the vouchers. Under the project- based rental assistance program, HUD enters into contracts with property owners to provide rental assistance for a fixed period of time. The project-based Section 8 program has multiple subprograms, including Section 8 New Construction and Substantial Rehabilitation, Loan Management Set-Asides, Preservation, and Property Disposition. Rental assistance under these project-based Section 8 subprograms has been generally used in conjunction with other public funding. For example, a Section 8 New Construction/Substantial Rehabilitation property could have been financed by a Federal Housing Administration (FHA) insured loan, a Section 202 direct loan, a U.S. Department of Agriculture Section 515 direct loan, or state housing finance agency bonds. Some of these programs provided financing for the construction or rehabilitation of affordable rental housing prior to the 1974 Act. (See table 1). Project-based Section 8 assistance may be provided only for tenants with incomes no greater than 80 percent of an area’s median income. Tenants generally pay rent equal to 30 percent of adjusted household income. As part of the Section 8 contract, property owners and managers are responsible for ensuring that households meet program eligibility requirements and calculating households’ payments. HUD pays rent subsidies directly to the property owners but does not pay them a separate administrative fee. The owners’ include their administrative costs in their HUD-approved rents. Project-based Section 8 properties are subject to physical and management reviews. Most Section 8 contracts also require the submission of annual financial reports from property owners. These reviews and reports are to ensure management accountability and the physical condition of public and assisted housing. HUD’s Real Estate Assessment Center (REAC) conducts physical inspections of all HUD multifamily properties every 1 to 3 years, depending on the property’s previous physical inspection score. Project-based Section 8 properties are subject to annual management and occupancy reviews to verify compliance with the terms of the project-based Section 8 contracts, regulatory and management agreements, and management plans. In the mid- to late-1990s, Congress and HUD made several important changes to the duration of housing assistance contracts, contract rents, and management of on-going contracts. In the mid-1990s because of budgetary constraints HUD shortened the terms of subsequent renewals after the initial 15- to 40-year terms began expiring. HUD generally reduced the contract renewal terms to 1 or 5 years, with the funding renewed annually subject to appropriations. In 1997, Congress passed the Multifamily Assisted Housing Reform and Affordability Act (MAHRA) to ensure that the rents HUD subsidized remained comparable with market rents. Over the course of the initial contracts with owners, contract rents in some cases had begun to substantially exceed local market rents as market conditions changed. MAHRA generally requires an assessment of each property when it nears the end of its original contract term to determine whether the contract rents are comparable to current market rents and whether the property has sufficient cash flow to meet its debt and daily and long-term operating expenses. However, certain projects are exempt from the market comparability requirement (e.g., projects financed by state agency bonds). If the contract rents are higher than market rents, HUD can decrease the contract rents to market rents upon renewal. Conversely, if the expiring contract rents are below market rates, HUD may increase the contract rents to market rates upon renewal. In 1999, because of staffing constraints (primarily in HUD’s field offices) and the workload involved in renewing the increasing numbers of rental assistance contracts reaching the end of their initial terms, HUD began an initiative to contract out the oversight and administration of most of its project-based contracts. The entities that HUD hired—typically public housing authorities or state housing finance agencies—are responsible for conducting on-site management reviews of assisted properties; adjusting contract rents; reviewing, processing, and paying monthly vouchers submitted by owners; renewing contracts with property owners; and responding to health and safety issues at the properties. These performance-based contract administrators (PBCA) now administer the majority of project-based Section 8 contracts. In the late 1980s, initial Section 8 contracts began expiring; by 2003, all of the original 20-year contracts had expired. Forty-year contracts will expire between 2014 and 2023. Section 8 owners are offered six options upon contract expiration. According to the HUD Section 8 Renewal Guide, Section 8 owners mayrenew without any modifications, with rents capped at HUD’s market levels; renew with rents that are elevated to market rents through the Mark-up-to- Market program; renew with rents that are reduced to market rents through the Mark-to- Market program; renew as a Section 8 “exception project;” renew as a Section 8 preservation or portfolio reengineering demonstration projects; and opt out of the Section 8 contract. When their contract expires, project-based Section 8 owners may decide not to renew their Section 8 contracts and convert their units from affordable housing to market rents. Once owners remove their properties from HUD programs, Section 8 households receive enhanced vouchers as long as they remain in their units. Owners are required to give both tenants and HUD notice of their intention to renew or opt out 1 year before the Section 8 contract’s expiration (see fig. 1). An owner who intends to opt out must also provide HUD with a 120-day notification. An owner who intends to renew is required to submit to HUD or the PBCA a request for contract renewal and a rent comparability study (when required) at least 120 days before the contract expires. Local HUD offices review the study to determine if the property’s current rents are at, above, or below market rates. If rents are at or below market rates, HUD field office staff will make any necessary adjustments and execute a new Section 8 contract. If rents are above market, HUD staff renews the contract (at above-market rents) for up to 1 year and forward the owner’s submission to the HUD Office of Affordable Housing Preservation (OAHP) for a Mark-to-Market restructuring. OAHP assigns properties to participating administrative entities (PAE) to carry out restructurings under the Mark-to-Market program on behalf of HUD. The owner then signs a renewal contract with the contract administrator. In a January 2004 report, we found that state and local agencies offer incentives to preserve affordable housing, including project-based Section 8 housing. Some of these agencies perceived that the information on opt-outs was not readily available. In this report, we recommended that HUD make this information more widely available and useful. States and localities may use funds provided by other federal programs to subsidize housing for low-income tenants. The HOME program, authorized by the Cranston-Gonzalez National Affordable Housing Act, is the primary block grant program that state and local governments use to develop affordable housing. Under the Low-Income Housing Tax Credit (LIHTC) Program, authorized by the Tax Reform Act of 1986, state housing finance agencies provide federal tax incentives to private investors to develop housing affordable to low-income tenants. Some states and localities have established housing trust funds and other financial mechanisms that have helped organizations acquire HUD properties and maintain their affordability to low-income tenants when owners want to sell properties and exit the program. Federal housing programs serve many different types of households and provide units that are affordable at different income levels. For example, under the LIHTC program, either 20 percent of units must be affordable to households with incomes of less than 50 percent of area median household income, or 40 percent of units must be affordable to households earning incomes less than 60 percent of the area median income. HUD pays assistance for project-based Section 8 units on behalf of tenants with incomes no greater than 80 percent of area median income. Further, the states and localities may use other tools and incentives, such as offering property tax relief, to encourage owners to keep serving low- income tenants. We found a number of patterns in the volume, characteristics, and locations of HUD’s project-based Section 8 housing contract renewals and terminations, from 2001 through 2005. First, from 2001 through 2005, 92 percent of project-based Section 8 housing assistance contracts and 95 percent of assisted units that were eligible for renewal were renewed. We also found that the percentages of opt-outs, foreclosures, and enforcements varied by project-based Section 8 subprogram. Relatively few owners opted out of the Section 8 program, and of those we interviewed, most reported that they did so to seek higher rents in the private rental market or to convert their units into condominiums. Second, we found that opt-outs shared other characteristics, such as property size and physical condition. Finally, opt-outs were more prevalent in some regions and localities. From 2001 through 2005, 14,373 of the 24,000 project-based contracts and 982,701 of the 1.4 million units were determined to be eligible for renewal or termination. Of these, 92 percent of the eligible contracts and 95 percent of the eligible units remained in the program (table 2). The percentage of opt-outs while small overall, varied by subprogram. As shown in figure 2, only 1 percent of project-based Section 8 contracts whose owners financed the properties through the Section 202 program opted out from 2001 through 2005.