Several changes made to the housing assistance payments (HAP) contract renewal process may have a significant impact on owners of Section 202 properties. These changes were outlined in Notice 2012-08 and clarified on the Frequently Asked Questions section of the HUD website.
Historically, Section 202 projects have been exempt from the Multifamily Assisted Housing Reform and Affordability Act of 1997 (“MAHRAA”). Because of this exemption, 202 owners could renew HAP contracts at above market rent using Option Four of the Section 8 Renewal Guide. HUD approved the rent requests based on submitted budgets, without regard to comparable market rents.
Under the new guidelines, budget based rent increases are not permitted if the requested rents exceed comparable market rents. This change affects all Section 202 owners with an Option Four Contract. Another change is that current debt service must now be used in the operating budget, meaning that owners who have refinanced 202 properties – or are planning on refinancing – could face a rent reduction. Historically, Section 202 owners used refinancing as a way of reducing debt service and then providing additional resident services. It is likely that such savings will be eliminated at the next HAP contract renewal.
Under the revised rules, owners of 202 properties with Option Four contracts will be able to request an annual rent increase through an OCAF adjustment or through a budget-based request. However, if rents are above market (as determined by a rent comparability study), a budget-based increase will not be approved, and the rent increase will be limited to the OCAF adjustment. This can have a serious impact on operations if the OCAF does not actually provide the rent required to meet operating expenses.
How Should 202 Owners Prepare for These Changes?
First, create a budget that uses current debt service, annual replacement reserves, and mortgage insurance premium. If there is a cash surplus after including all these items in the budget, the property could face a rent reduction at the next HAP contract renewal. If you own a 202 property and have refinanced at higher interest rates, consider proactively renewing with a new 20 year HAP contract. This could be followed by a second refinance at a lower rate and lower debt service. Also, be cognizant of market rents; if rents are above market, you will only be eligible for OCAF adjustments. The best advice for those owners considering a 202 refinance is to work closely with the lender to determine the impact on rents. If the decision is made to refinance, work closely with HUD production and asset management and the Contract Administrator to properly structure the refinancing.