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HUD Guidance on How Low Physical Inspection Scores Will be Handled

On October 29, 2018, HUD issued Notice H-2018-08 to provide guidance to HUD Multifamily staff regarding actions that should be taken when privately owned properties governed by various HUD housing programs score less than 60 or REAC inspections. The notice also explains what should happen if an owner fails to certify within three business days that exigent health and safety (EHS) violations have been corrected. The notice was effective on October 29, 2018 and applies to projects for which a physical inspection score was released on or after May 5, 2017. Notice H-2018-08 replaces Notices H-2015-02 and 2012-16. Properties participating in the following programs are subject to the Notice: Section 8 Project-Based Rental Assistance;Rent Supplement;Rental Assistance Program (RAP);Section 202 or 811 Project Rental Assistance Contracts (PRAC);Section 201/162 Project Assistance Contracts (PACs);Section 811 Project Rental Assistance (PRAs); andSenior Preservation Rental Assistance Contracts (SPRACs). Actions to be taken by HUD if a property scores less than 60 on a REAC and/or when an owner fails to certify within three business days that EHS deficiencies have been corrected include: Issue within 15-days of the physical inspection report a Notice of Violation of Regulatory Agreement (NOV) and/or a Notice of Default of Subsidy Contract (NOD). The NOV/NOD must notify the owner of the violation/default and provide a reasonable time to correct the deficiency - that is, a "cure period." Owners must provide a copy of the NOV/NOD to residents by leaving a notice under each door, posting the notice in the mail room, and on each floor, or by other means. HUD must also provide a copy of the NOV/NOD to the chief executive officer of the locality.These are two of the most important components of the Notice - both the residents of the property and the local government must be informed about the poor physical condition of the property.Issue a Demand for Corrective Action (DCA) if a property scores above 60, but HUD staff believes that unsatisfactory conditions exist (this provides a good deal of discretion to HUD staff). The DCA may require the owner to perform a unit survey and conduct necessary repairs.Conduct a REAC inspection to ensure that all deficiencies have been corrected. The timeframe for conducting the reinspection depends on whether the REAC score was 30 or less.If the score is 30 or less, the re-inspection should occur as soon as possible after the expiration of the cure period. If the score is above 30, and the owner meets the required deadlines for correction, the re-inspection should occur within one-year after the date of the last inspection. Finally, federal regulations require HUD to submit quarterly reports to Congress. The reports must include all sites that receive a REAC score of less than 60 or that receive an Unsatisfactory Management & Occupancy Review (MOR) within the prior 36-months. The report must include actions taken to address each site s physical condition to protect residents. This Notice should serve as a warning to owners of properties operating under the applicable HUD programs. Failure to maintain these developments in sound physical condition and operate them in accordance with HUD regulations will result in punitive action by HUD, negative reaction by residents, and possible local regulatory enforcement by cities or counties.

The Shutdown and Affordable Housing

As we enter the third week of the partial government shutdown, the impact is beginning to affect more than just the unfortunate federal workers who are not being paid. Some of America s poorest families may soon be hit by the inability of our leaders to keep the government running. The Department of Housing and Urban Development (HUD) is one of the seven agencies most directly affected by the shutdown. Since December 22, the vast majority of federal housing employees have been forced to stay home without pay, and they are prohibited from doing any work - including responding to emails. The impact is the same for the Rural Housing Service, which oversees the Section 515 program. While Section 8 assistance payments are being made at this time, HUD officials have stated that these payments could be suspended if the shutdown drags into February. About 95% of HUD s 7,500 employees have been furloughed without pay, including all those who provide assistance to property owners. If the shutdown is resolved this month, the financial impact on owners of Section 8 properties and those with voucher residents should be minimal. However, at this point, there is no agreement in sight. I recommend that affected owners think about delaying any expenditures that can be put off and keep project operating accounts as funded as possible. Don t make any purchases that can wait and delay until the last minute any payments that have deadlines. At this point, cash flow is critical, so be aggressive in collections and passive with regard to expenditures - and we ll all hope for the best.

PHA Options in Repositioning Public Housing

On November 13, 2018, HUD s Office of Public and Indian Housing (PIH) notified Public Housing Agencies (PHAs) of the options available relative to the repositioning of public housing projects. PHAs have three options relative to how they will ultimately deal with their public housing stock. Rental Assistance Demonstration ("RAD") Program: This is by far the most popular and well known option. Up to 455,000 public housing units are being converted under the RAD program to either Project-Based Vouchers (PBVs) or Project-Based Rental Assistance (PBRA).Voluntary Conversion: This is the process of converting public housing to vouchers, also known as a "Section 22" conversion. Public housing tenants are given either tenant-based or project-based vouchers. This is called "vouchering out" of public housing. This conversion requires that a PHA submit a "conversion assessment" to HUD as part of the annual PHA plan process. The conversion assessment contains five elements:An analysis of the cost of continuing to operate as public housing, compared to the cost of providing vouchers;An analysis of the market value of the project before and after rehab;An analysis of the ability of public housing residents to use a voucher, given housing market conditions;An impact analysis on the surrounding community, including the effect of conversion on the availability of affordable housing as well as the concentration of poverty in the neighborhood; andA description of the PHAs planned use of the property. The conversion must meet three requirements:The conversion cannot be more expensive than continuing to operate as public housing;The conversion must principally benefit the residents of the development, the PHA itself, and the community.With regard to resident benefit, the PHA must analyze the availability of landlords willing to accept vouchers, as well as access to schools, employment, and transportation; andThe conversion may not adversely impact the availability of affordable housing in the neighborhood. Due to these complex (and difficult to meet) requirements, voluntary conversion is a rarely used option.Section 18 Demolition: PHAs may decide to demolish or dispose of an entire development, or a portion of a development, for a variety of reasons, including the project being obsolete in terms of physical condition, location, or other factors making it unsuitable for housing purposes. Disposition may also occur for reasons such as a change in the neighborhood, the location of the project no longer being conducive to residential use, or the land on which the development was built is sufficiently valuable that the PHA can replace the existing development with a better development at no cost to HUD. Some PHAs have granted HUD a formal interest in a public housing property through a Declaration of Trust (DOT). In such cases, the PHA was required to inform the public of the granting of this interest and provide public notice that the property must be operated in accordance with public housing requirements. If a PHA has given HUD a formal interest in the public housing project, the property may not be sold or otherwise encumbered without HUD approval. This approval must be granted before any of the three methods of repositioning may be used. HUD is encouraging all PHAs to reposition public housing projects to address the overwhelming capital needs of public housing. HUD s goal is to "reposition" 105,000 public housing units by September 2019. HUD will be contacting all PHAs that own public housing in the coming months to review the various options. This effort to reposition public housing may present opportunities for private developers, and developers in cities with public housing should initiate discussions with local PHAs about opportunities for participation in the repositioning.

HUD Issues Utility Allowance Factors for 2019

HUD published in the November 23, 2018 Federal Register the Utility Allowance Adjustment Factors (UAFs) for 2019. HUD permits owners to use these adjustment factors to adjust baseline utility allowances that were prepared in accordance with Housing Notice 2015-04. The factors are effective for any site with an anniversary date on or after February 11, 2019. The UAFs can be found at www.govinfo.gov/content/pkg/FR-2018-11-23/pdf/2018-25440.pdf. HUD requires multifamily owners in its programs that receive rent subsidy and where HUD approves the utility allowances, to adjust that utility allowance each year. This methodology is required for the following programs: Project-Based Section 8;Section 101 Rent Supplement;Section 202/162 Project Assistance Contract ("PAC");Section 202 Project Rental Assistance Contract ("PRAC");Section 202 Senior Preservation Rental Assistance Contracts ("SPRAC");Section 811 PRAC;Section 236;Section 236 Rental Assistance Payments; andSection 221(d)(3) Below Market Interest Rate ("BMIR") Site owners are required to establish a "baseline "utility allowance for each of their bedroom sizes once every third year. For the two years after the baseline is established, owners have the option to perform a factor-based utility allowance. It is these factors that HUD has recently published. Owners of affected projects should review and implement the UAFs for their properties for 2019.

Minimum Wage Update - 2019

As we enter 2019, the minimum wage will change in a number of states and localities. As affordable housing professionals, it is always a good idea to be aware of the minimum wage in the states in which you have properties. Following are the states with minimum wages that are higher than the federal minimum wage of $7.25 per hour. I ve also noted the changes upcoming for 2019 that I am aware of. While I believe this is a comprehensive list, owners and managers should always check with their state labor departments (as well as cities) to make sure there has not been a change in addition to the ones noted here. Unless noted otherwise, the changes are scheduled to go into effect on January 1: Alaska: $9.84;Arizona: $11.00 (increased from $10.50);Arkansas: $8.50;California: $12.00 (increased from $11.00);Colorado: $11.10 (increased from $10.20);Connecticut: $10.10;Delaware: $9.25 (effective 10/1/19 - increased from $8.25);District of Columbia: $14.00 (effective 7/1/19 - increased from $13.25) - next to San Francisco, which is $15.00, this is the nation s highest minimum wage;Florida: $8.25;Hawaii: $10.10;Illinois: $8.25;Maine: $11.00 (increased from $10.00);Maryland: $10.10;Massachusetts: $12.00 (increased from $11.00);Michigan: $9.25;Minnesota: $9.65 (for large employers) - $7.87 for small employers;Missouri: $7.85;Montana: $8.30;Nebraska: $9.00;Nevada: $8.25;New Jersey: $8.60;New Mexico: $7.50;New York: $11.10 (increased from $10.40);Ohio: $8.30;Oregon: $11.25 (effective 7/1/19 - increased from $10.25);Rhode Island: $10.50;South Dakota: $8.65;Vermont: $10.50;Washington: $12.00 (increased from $11.50); andWest Virginia: $8.75

Occupancy Standards and Fair Housing

Every owner and manager of multifamily properties must develop occupancy standards for their property. It is these standards that determine how many people may live in a unit. When deciding on an occupancy standard, the key question is always - what is reasonable?   The industry standard has long been two people per bedroom. This standard originated from the HUD "Keating memo" in 1991. However, while indicating that the two-person per BR standard may be acceptable the memo made it clear that it was a "guide," and not a rule or a "safe-harbor". HUD indicated that factors in determining what is reasonable include:   Bedroom size; and Other factors - e.g., age of children.   Recent court cases have challenged the two-person per bedroom standard, especially in areas where state or local occupancy laws allow more people.   Occupancy standards are generally associated with familial status provisions of fair housing law. Courts have been quick to find that overly restrictive standards are a violation of fair housing law if they present artificial impediments to the ability of families with children to find housing.   While fair housing law permits the establishment of occupancy standards, these standards may not unreasonably limit the ability of families with children to find housing.   Owners should avoid a "one size fits all" policy. The characteristics of each property should be considered. Federal law defers to state and local law in the development of such policies. Nothing in federal law "limits the applicability of any reasonable local, state, or Federal restrictions regarding the maximum number of occupants permitted to occupy a dwelling."   It is worth noting that the Keating Memo was not intended as public guidance - it was internal guidance for HUD enforcement staff. In 1998, Congress ordered HUD to adopt the Keating standard as HUD policy. However, as noted, this is not the only standard HUD will use in determining what is reasonable. For example, if bedrooms are large, more than two people per bedroom may be reasonable. Also, large apartments may have extra rooms such as dens, office, or loft that can be suitable as a bedroom. Other factors to be considered include the age of children, unit design, and utility capacity.   Basic Considerations When Setting Occupancy Standards Examine Current Standards: Don t automatically use the two person/bedroom standard. If local law will allow more than two people per bedroom, the more restrictive policy will be hard to defend. If a "rule-of-thumb" policy is used while researching local requirements, I recommend the "2+1" policy; i.e., two people per bedroom plus one (e.g., two-bedroom unit will permit five occupants). Check State & Local Codes: if there are state or local occupancy codes, they may be based on minimum square footage per person or minimum square footage per bedroom per person. A property will rarely be challenged for following state or local standards. In fact, HUD will review such standards when determining reasonability. Determining the applicability of state or local codes can be difficult. There may be fire codes, building codes, zoning codes, and property maintenance codes - all of which will have separate requirements. Consultation with a local attorney is always recommended when researching local requirements. Set Limits on the Number of People - Not the Number of Children: This was a primary element of the Keating Memo. Know the "Red Flags" that Fair Housing Agencies Will Look for: Making discriminatory statements; Adopting discriminatory rules relating to common areas; Taking steps to discourage the presence of children; Enforcing occupancy policies only against families with children; and Marketing a community as "adults only."   It is also unlawful to impose special requirements or conditions on families with children, such as limiting access to recreational services.   Be Careful When Considering the Age of Children When Setting Policies: While it may seem "reasonable" to deny a one-bedroom unit to an adult couple with a teenager, a couple with an infant should generally be allowed in a one-bedroom unit. Also, owners may not require male and female children, regardless of age, to have separate bedrooms. In addition, owners should not require adults and children of either gender to have separate bedrooms. Generally, it is best to follow the occupancy policy without regard to family characteristics. In other words, if your policy is to permit three people to live in a one-bedroom unit, you probably should permit any three people to live in the unit. Consider the Physical Limitations of Building Systems: The limits of a building s systems may provide a substantial, legitimate, nondiscriminatory reason for limiting the number of occupants. The capacity of septic, sewer, or other building systems can play a role in how an occupancy policy is determined. Document the Reasons for the Policy: This documentation should demonstrate a review of the following elements: Size of bedrooms & Unit: E.g., a family of five should be able to live in a unit with two large bedrooms and a large living room, but may not be suitable for a small two-bedroom mobile home; and Unit Configuration: E.g., two adults and three children apply for a two-bedroom unit. A unit with two bedrooms and a den would certainly be suitable for this family, but a two - bedroom with no other adequate sleeping room may not be.   Ultimately, the goal when establishing an occupancy policy should be to avoid over-crowding units, while not inhibiting the ability of families with children to find suitable housing. As long as an owner can demonstrate a sound reason for any occupancy restrictions, defending these policies - if challenged - is much more likely.  

Verifying the Income of Ride-Hailing Drivers

Verifying the Income of Ride-Hailing Drivers A recent study by the JP Morgan Chase Institute showed that from late 2013 to the Spring of 2018, there was a 2,000 percent increase in the number of Uber and Lyft drivers. This is one of the fastest growing segments of the employment industry and is known as "gig" employment. These drivers are considered self-employed and the average driver earns $20 per hour.   A growing number of people living in affordable housing developments (HUD, LIHTC, etc.) are engaged in ride-hailing businesses and managers of such properties are required to verify the income of these individuals - even though the income may be sporadic. While sporadic and non-recurring income is usually not counted for housing purposes, since these drivers are considered "self-employed," a reasonable determination of expected income is required.   Primary Verification Methods for Ride-Hailing Drivers There are a number of options available for verifying the income of ride-hailing drivers, including the following:   IRS Tax return, Form 1040, including Schedule C; Audited or unaudited financial statements (i.e., income/expense statement); Business loan application to a bank; or (as a last resort) A notarized affidavit regarding the net income from prior years.   In addition to these methods, all ride-hailing companies provide income statements showing monthly, quarterly, and annual earnings that are reported to the IRS. A Summary of Payments from the ride-hailing company is always available to the drivers and should always be requested. If using applicant provided financial statements, the amount of income counted should be the net income to the business. This is the gross receipts minus legitimate business expenses. For tax purposes, ride-hailing drivers must keep receipts of business expenses and should be able to provide a breakdown of those expenses. Deductible expenses include:   Passenger amenities (e.g., water, gum, etc.); Tolls; Parking; Maintenance; Gas; Vehicle loan interest; and Depreciation Note: only straight-line depreciation may be deducted for housing purposes. If a tax return or other document shows accelerated depreciation, managers may need to assistance of an accountant to determine the amount of straight-line depreciation.   Verifying the income of any person who recently started a business can be challenging, and this includes the income of ride-hailing drivers. In cases where tax returns have not yet been filed, a notarized statement from the driver with a statement of net income, along with income and expense records since the start of the business is recommended. From this information management may be able to determine a reasonable income projection, but there should still be follow up in a few months to ensure that the projection was reasonable.   As with all self-employed individuals, ride-hailing drivers are required to keep financial records. Using these records is generally the best and most acceptable method for determining the likely income of ride-hailing drivers.

Dealing with "Zero Income" Households

While "zero income" households are rare on Low-Income Housing Tax Credit properties (since there is no rental assistance, income is required in order to pay the rent), such households are not uncommon on Section 8 properties or developments with Rural Development rental assistance. There are a number of reasons why household members - or even entire households - may falsely claim zero income. Examples include   One member may claim no income in order to income qualify for the unit; or An entire Section 8 household may claim no income in order to pay no rent.   While residents may sign zero income affidavits, owners may not rely on such statements if a reasonable person would conclude that the household s income is higher that what is being represented.   When a statement of zero income is not credible, a detailed interview should be conducted. Elements of the interview should include:   Work History: ask about any jobs held in the past. Check credit reports for prior employers. If there is a work history - Why are they not now working? Are they seeking employment? If there is no work history, how have expenses been met in the past year?   Sources of Income: Ask about income from all sources, including Workman s Compensation; Unemployment; Inheritance; and Trust Funds Method of Paying for Living Expenses: how does the household pay for Groceries Clothing Rent Toiletries Utilities Laundry Phone Transportation Cleaning Supplies Money Accounts: Ask for documentation of bank accounts. If bank statements are obtained, look at deposits and withdrawals. Where did the money come from? Loan Information: if an applicant states that deposits are a loan (or repayment of a loan), ask to see loan documents. Who is making (or repaying) the loan? If the applicant claims to be the recipient of a loan, how will they repay it? Roommate History: ask about past roommates. If a roommate covered some of the expenses, will that roommate be moving in? If not, how will the expenses be paid?   Truly zero income households are virtually non-existent. This is because a household with absolutely no income would not be able to survive. However, it is possible to have a zero-income certification on a rent-assisted property. In these cases, management must ensure that a "survival statement" is obtained on which the applicant/tenant demonstrates how the costs associated with daily living will be met. And, for Section 8 and Rural Development properties with zero income certifications, a re-interview of the household every 90-days in order to ascertain potential income is strongly recommended.  

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