The
Section 8 Program was authorized by Congress in 1974 and developed
by HUD to provide rental subsidies for eligible tenant families
(including single persons) residing in newly constructed, rehabilitated
and existing rental and cooperative apartment projects.
The
rents of some of the residential units are subsidized by HUD under
the Section 8 New Construction ("New Construction"), Substantial
Rehabilitation ("Substantial Rehabilitation") and/or Loan
Management Set-Aside ("LMSA") Programs. All such assistance
is "project-based", i.e.; the subsidy is committed by
HUD for the assisted units of a particular Mortgaged Property for
a contractually determined period.
The
New Construction and Substantial Rehabilitation Programs provide
rental assistance in connection with the development of newly constructed
or substantially rehabilitated privately owned rental housing financed
with any type of construction or permanent financing, including
the applicable FHA Multifamily Mortgage Insurance Programs. The
maximum term of assistance provided by HUD under the New Construction
and Substantial Rehabilitation Programs for a project financed with
the proceeds of a loan insured by FHA is 20 years. For any mortgaged
property which received a notice of selection from HUD for New Construction
or Substantial Rehabilitation assistance prior to November 15, 1979
or February 20, 1980, respectively, the subsidy is made available
to the project owner in five-year increments, subject to renewal
at the owner's option at the end of each five-year incremental term
for a further five years or until the end of the maximum
term of assistance; for projects which received a notice
of selection for New Construction or Substantial Rehabilitation
assistance from HUD on or after such dates (collectively,
the "New Regulation Projects"), the subsidy is generally
committed to the project for a single 20-year term without provision
for owner cancellation of the assistance prior to expiration of
the term. The Housing and Urban Rural Recovery Housing Act of 1983
repealed the statutory authority for the New Construction and Substantial
Rehabilitation Programs.
The
LMSA Program was developed by HUD primarily to provide financial
assistance in the form of rental subsidies to multifamily properties
subject to FHA insured mortgage loans which are in immediate or
potential financial difficulty; and thereby to reduce the volume
of mortgage loan defaults as well as claims for FHA mortgage insurance
benefits from private lenders holding the FHA insured mortgage loans
on such projects. HUD also provides rental assistance under the
LMSA Program to properties subject to mortgage loans held by FHA.
HUD is authorized to make a commitment of LMSA assistance to a mortgaged
property for a maximum fifteen year period; such assistance to be
made
Available
to the owner in five year increments, subject to renewal at the
end of each five-year period at the owner's option, with the approval
of HUD. In recent years, HUD has provided LMSA assistance for a
maximum single five-year term; however, at this time Congress has
not appropriated the necessary funds to enable HUD to provide any
new contracts for LMSA assistance except in the context of one year
renewals of expiring existing LMSA agreements.
HAP Contracts
HUD
provides Section 8 rental subsidies to the owners of certain mortgaged
properties pursuant to a HAP Contract. The entity responsible for
the administration of the Section 8 assistance pursuant to a particular
HAP Contract is the designated "Contract Administrator".
Under the New Construction and Substantial Rehabilitation Programs,
either HUD or a "Public Housing Agency" may serve as Contract
Administrator. As defined under applicable HUD regulations, a "Public
Housing Agency" is any State or local governmental instrumentality
that is authorized to engage in or assist in the development or
operation of housing for low-income families. Pursuant to applicable
HUD regulations, HUD acts as the Contract Administrator for LMSA
assistance, but has the authority to contract with another entity
for the performance of some or all of its responsibilities as Contract
Administrator. HUD currently serves as the Contract Administrator
under the HAP Contracts for almost all the assisted Mortgaged Properties.
At present, HUD intends that HAP Contract administration for the
assisted Mortgaged Properties will be conducted and coordinated
by the HUD offices located in Denver, Colorado, Des Moines, Iowa
and Atlanta, Georgia. However, in the future, the responsibilities
of HUD as Contract Administrator under the HAP Contracts may be
assumed by other HUD offices or by Public Housing Agencies.
HAP
Contracts specify the number of units in a particular mortgaged
property for which Section 8 assistance will be provided. Under
the HAP Contracts, HUD provides Section 8 rental subsidies to the
project owners in an amount equal to the difference between the
HUD approved rent (the "Contract Rent") for a particular
assisted unit and the HUD required rental contribution from eligible
tenant families. The Housing Act prescribes as the requisite tenant
rental contribution an amount equal to the greatest of (i) 30% of
the tenants' family monthly adjusted income, (ii) 10% of the tenants'
family monthly gross income, and (iii) if the tenant family receives
welfare assistance from a public agency and a portion of such assistance
is adjusted in accordance with the family's actual housing costs,
the monthly portion of the welfare assistance so adjusted. For Section
8 assisted units for which the cost of utilities is not included
in rent, the tenant rental contribution includes the amount of HUD's
estimate of the average monthly cost of utilities and other services
(excluding telephone) for the unit in question (the "Utility
Allowance").
Tenant Admission and Occupancy Criteria
Section
8 rental subsidies are provided to project owners on behalf of families
that are eligible low-income families at the time of their admission
by the project owners to the program. Under the Housing Act, "low
income families" are defined as those families whose annual
incomes do not exceed eighty percent (80%) of the median income
for the area in which the project is located, adjusted for family
size, as determined by HUD at least annually. Pursuant to the Housing
Act, not more than 25% of the units in an assisted mortgaged property
may be made available for occupancy by low income families other
than "very low income families" (as herein defined); except
with respect to any project in which such low income families occupied
more than 25% of the units in the affected project as of November
28, 1990. In addition, the applicable HUD regulations prohibit,
without prior HUD, approval, the admission of any low-income family
other than a very low-income family to any project subject to a
HAP Contract in effect on or after October 1, 1981. A "very
low income family" is defined as a family whose annual income
is at or below 50% of the median income of the area in which the
project is located, adjusted for family size.
Under
the Section 8 Program, tenant selection is regarded as the responsibility
of the owner of an assisted mortgaged property, subject to compliance
by such owner with the applicable income eligibility criteria and
certain occupancy requirements, including those pertaining to projects
designated for elderly and non-elderly disabled families. In addition,
applicable HUD regulations restrict the availability of Section
8 assistance to citizens of the United States and noncitizens of
the United States who have achieved certain eligible immigration
status. Project owners are prohibited from discriminating against
applicants on the basis of family's status, as well as race, sex,
creed, religion, age or disability.
Owner Obligations
In
consideration for the receipt of Section 8 assistance, the HAP Contracts
impose certain general obligation on the owners of assisted properties
including; (i) the leasing of assisted units to Section 8 income
eligible families, (ii) the maintenance of the project as decent,
safe and sanitary housing for the residents, (iii) compliance with
applicable nondiscrimination and equal employment opportunity requirements,
(iv) compliance with Section 8 reporting, management and accounting
requirements, and (v) the procurement of the prior written approval
of HUD and the Contract Administrator to any transfers of the project
or any portion thereof and any assignment of the HAP Contract.
New
Construction and Substantial Rehabilitation HAP Contracts also require
the prior approval of HUD and the Contract Administrator of any
refinancing of the exiting project indebtedness, which includes
any modification or restructuring of the debt. In addition, pursuant
to the Housing Act, an owner of a mortgaged property receiving assistance
under the New Construction or Substantial Rehabilitation Program
may not pledge or assign its interest in the applicable HAP Contract
as additional security for any loan or obligation, unless HUD approves
the terms of any such financing or refinancing. Neither the Housing
Act nor the relevant HAP Contracts impose similar requirements for
LMSA projects. No representation is made as to whether any owners
of any of the Mortgaged Properties have pledged the relevant HAP
Contract to any third parties.
Pursuant
to HUD regulations and applicable guidelines, certain HAP Contracts
entered into by the owners of New Regulation Projects (with certain
exceptions as hereinafter described) require the owners to comply
with the following additional requirements: (i) to submit to the
Contract Administrator within sixty (60) days after the end of each
fiscal year of the project, audited financial statements for the
project; (ii) to establish with the holder of the project mortgage
loan an interest bearing replacement reserve to pay for extraordinary
project maintenance needs and the repair and replacement of capital
items which is funded with monthly deposits that are subject to
adjustment by the AAF (defined below) concurrent with an adjustment
in Contract Rent levels, (iii) to limit generally distributions
of cash flow of the project remaining after payment of all debt
service and other project payables; and (iv) to deposit with the
holder of the project mortgage loan or other depository approved
by HUD any revenues of the project remaining after payment of the
aforesaid distributions into an interest bearing account called
the residual receipts account which may be used for a variety of
HUD-approved project-related purposes, including debt service.
In
general, New Construction and Substantial Rehabilitation HAP Contracts,
executed by an owner of an assisted mortgage property pursuant to
a notice of selection issued by HUD prior to November 15, 1979 and
February 20, 1980, respectively, do not contain any of the aforementioned
additional requirement for New Regulation Projects. All New Regulation
Projects are generally subject to the audit requirements of the
applicable HAP Contracts. All New Regulation Projects (other than
those projects with more than 50 units no more than 20% of which
receive Section 8 assistance) are also required to establish and
maintain a replacement reserve and residual receipt account under
the HAP Contract. However, only New Regulation Projects with more
than 50 units of which more than 20% receive Section 8 assistance
are subject to the aforementioned income distribution restrictions.
Mortgaged properties that receive LMSA assistance pursuant to the
LMSA HAP Contract form in effect prior to May 1993 are not subject
to any of these requirements. LMSA HAP contracts for mortgaged properties
in effect after May 1993 require project owners to submit audited
project financial statements.
In
general, the HAP Contracts provide that a violation or the failure
by the project owner to comply with any provision of the HAP Contract
or any lease with project residents or the assertion or demonstration
by the project owner of an intent not to perform some or all of
the owner's obligations under the HAP Contract or any residential
lease constitutes a default thereunder. Other specified defaults
include the failure by the owner to make a reasonable effort to
lease the assisted units in a mortgaged property to Section 8 eligible
tenant families and the making of any false statement or misrepresentation
to HUD regarding the project mortgage loan or HAP Contract; and
the violation by the project owner of
Any
applicable HUD regulation or term of any originally FHA held or
insured mortgage loan to which the project is subject at the time
of the default.
If
the project owner fails to cure any default under the HAP Contract,
the Contract Administrator or HUD may take any of the following
remedial actions against the project owner: (i) to reduce, suspend
or terminate HAP payments; (ii) to recover from the owner any excess
payments; (iii) to collect all rents and other revenues of the project
(including Section 8 assistance payments) and to apply such funds
in payment of any or all necessary operating expenses of the project,
including debt service; (iv) to take possession of the project or
apply to any State or Federal court for the appointment of a receiver
for the project; and (v) to apply to any State or Federal court
for specific performance of the HAP Contract, injunctive relief
against any violation of the HAP Contract as well as any other relief
that may be appropriate in a specific case. Other available remedies
against project owners in violation of a HAP Contract include (i)
the direct payment to the holder of the originally FHA-held or insured
mortgage loan on a LMSA project of the Section 8 assistance payments
in the event of a default by the mortgagor under the loan, (ii)
the suspension, debarment or imposition of other restrictions on
participation of the project owner in any future HUD program or
project, and (iii) a variety of civil and criminal penalties, including
imprisonment. In addition, HUD intends to vigorously pursue available
remedies, including abatement of Section 8 subsidies, for owner
of HAP Contract requirements, particularly violations relating to
the housing quality standards of the program.
Terms of Leases
HUD
guidelines prescribe the form of lease to be utilized by project
owners for tenant families receiving assistance under the New Construction,
Substantial Rehabilitation and LMSA Programs. In general, the initial
term of any such lease must be at least one year. In addition, the
requisite HUD form of lease currently provides for automatic renewal
of the stated term of the lease, unless and until the lease is terminated
as a result of a default by the tenant family thereunder. The project
owner may terminate the tenancy of assisted tenant families for
material non-compliance with the lease, failure on the part of the
tenant family to carry out their obligations under any State or
local landlord and tenant law, or for other good cause.
Contract Rents
Initially,
Contract Rents, plus Utility Allowances, may not exceed the HUD
determined so-called fair market rents ("Fair Market Rents")
for similarly situated units in newly constructed, substantially
rehabilitated or existing or moderately rehabilitated developments
in the area, although, under special circumstances, HUD can approve
initial Contract Rents (plus Utility Allowances) for particular
assisted projects in an amount up to 120% of the applicable Fair
Market Rents. The Fair Market Rents are published at least annually
by HUD in the Federal Register. The Fair Market Rents constitute
HUD's determination of the rents including utilities (except telephone),
if applicable, ranges and refrigerators, parking and all
maintenance, management and other essential housing services which
would be required to obtain, in a particular market area, privately
developed and owned rental housing of modest design with suitable
amenities. In light of the termination of the New Construction and
Substantial Rehabilitation Programs, HUD no longer publishes
Fair Market Rents for new construction or substantial rehabilitation
projects.
The
HAP Contracts provide for the payment of Section 8 assistance for
assisted units actually occupied by Section 8 eligible low-income
families. However, a subsidy equal to 80% of the Contract Rent may
be payable for a period of sixty days for all assisted mortgaged
properties upon the occurrence of a vacancy in an assisted dwelling
unit. HAP Contracts for Section 8 New Construction and Substantial
Rehabilitation assistance also provide that vacancy payments may
continue for an additional 12-month period in an amount equal to
the debt service attributable to the unit, under certain circumstances.
If the Contract Administrator determines that the failure by the
owner to lease assisted units in a mortgaged property to Section
8 eligible tenant families is not a temporary problem, the HAP Contracts
provide that the Contract Administrator may reduce the number of
units designated for assistance under the agreement on a temporary
or permanent basis. In addition, an owner of an assisted mortgaged
property may request certain additional payments of Section 8 assistance
as compensation for losses incurred relating to unpaid tenant rents
and other charges, property and other unit damages, and other sums
due under the applicable lease subsequent to the vacating of an
assisted unit by the tenant family.
Adjustments
in Contract Rents are available to owners of assisted mortgaged
properties on at least an annual basis pursuant to the application
of a formula adjustment procedure determined by HUD known as the
automatic Annual Adjustment Factor ("AAF") which is published
by notice in the Federal Register. The AAF is currently based on
a formula using data on residential rent and utilities cost changes
for particular market areas from the most recent Bureau of Labor
Statistics Consumer Price Index and the HUD Random Digit Dialing
rent change surveys. Such adjustments are determined by multiplying
the Contract Rent in effect for a particular unit in an assisted
mortgaged property on the anniversary date of the HAP Contract by
the applicable AAF. All Mortgaged Properties receiving assistance
under the New Construction and Substantial Rehabilitation Programs
and most Mortgaged Properties receiving assistance under the LMSA
Program utilize the AAF method of Contract Rent adjustment.
HUD
also has the discretion to approve special adjustments in Contract
Rents on a case by case basis for projects subject to the AAF method
of Contract Rent adjustment to reflect increases in actual and necessary
expenses of owning and maintaining the subsidized units which have
resulted from substantial and general increases in such expenses
relating to real property taxes, utilities not covered_ by regulated
rates, project security or drug-prevention measures, lead-based
paint abatement measures, and
Other
similar costs to the extent such general increases are not adequately
compensated for by the AAF method of Contract Rent adjustment. However,
HUD has the right to cancel any such special rent adjustments at
any time. Current HUD guidelines provide that HUD may cancel a special
rent adjustment at the time of any subsequent request by the project
owner for an AAF Contract Rent adjustment.
In
addition, HUD has the discretion to authorize increases or decreases
in Contract Rents for mortgaged properties receiving assistance
under the LMSA Program based on a budgetary review of an individual
project's financial needs. Pursuant to this authority, HUD may approve
increases in Contract Rents for such projects to compensate the
owners thereof for any increases in operating expenses over which
the owners have no effective control. HUD intends to convert all
such projects to the AAF method of Contract Rent adjustment effective
as of the anniversary date of the affected LMSA HAP Contracts following
the sale of the Mortgage Loans to the Trust.
The
HAP Contracts and applicable HUD guidelines prohibit any adjustment
in Contract Rents, which reduces such rents to a level below that
in effect as of the effective date of the applicable HAP Contract.
In addition, under the Housing Act, HUD is prohibited from requiring
any decrease in Contract Rents in effect on or after April 15, 1987
for mortgaged properties receiving assistance under the New Construction
and Substantial Rehabilitation Programs except in the context of
a refinancing (including a modification) of the project indebtedness
which results in a reduction in periodic payments in debt service.
This restriction is not applicable to mortgaged properties receiving
assistance under the LMSA Program.
In
addition, pursuant to the Housing Act, the HAP Contracts and applicable
HUD regulations and guidelines require that all adjustments in Contract
Rents for assisted mortgaged properties, regardless of the type
of Section 8 assistance, be subject to the limitation that in no
case shall such adjustments result in material differences in rents
charged for comparable assisted and unassisted units in the same
market area; except, in the case of mortgaged properties receiving
assistance under the New Construction or Substantial Rehabilitation
Programs, to the extent any such differences existed at the time
of execution of the HAP Contract. The Housing Act also authorizes
HUD to promulgate regulations governing the conduct of comparability
studies to implement this market comparability standard for assisted
mortgaged properties subject to the AAF method of Contract Rent
adjustment. Based on current law, the implementation by HUD of this
market comparability standard could result in the limitation of
any upward adjustments in Contract Rents for New Construction, Substantial
Rehabilitation and LMSA projects, as well as decreases in such Contract
Rents for LMSA projects. However, to date, HUD has not issued regulations
regarding the requisite comparability- standards.
The
Department of Veterans Affairs and Housing and Urban Development
and Independent Agencies Appropriations Act, 1995 (the "1995
HUD Appropriations Act") required HUD to impose rent comparability
standards as a limit on AAF adjustments in Contract Rents for certain
New Construction and Substantial Rehabilitation projects during
fiscal year 1995. HUD was also required to implement these comparability
standards for such AAF adjustments conducted in fiscal year 1996,
pending enactment by Congress of regular fiscal year 1996 appropriations
for HUD. This legislation known as the Department of Veteran Affairs
and Housing and Urban Development, and Independent Agencies Appropriations
Act, 1996 (the "1996 HUD Appropriations Act") was enacted
by Congress on April 26, 1996. However, because the 1996 HUD Appropriations
Act does not extend the rent comparability requirements of the 1995
HUD Appropriations Act for AAF Contract Rent Adjustments for New
Construction and Substantial Rehabilitation Projects, these requirements
will not apply to Contract Rent adjustments for HAP Contract anniversary
dates on or after April 26, 1996.
Expiration, Termination and Conversion of Section 8 Assistance
Some
forms of HAP Contracts grant the project owner the option to renew
the contract for one or more incremental terms, up to the specified
maximum term. For New Construction or Substantial Rehabilitation
projects other than New Regulation projects, which are subject to
a single term, the renewal is at the sole option of the owner. For
LMSA projects, the renewal of any such incremental term requires
the agreement of both the owner and HUD. If the HAP Contract is
renewed, the provisions of the agreement will remain in effect during
the additional incremental term. During the additional term, HUD
is obligated to make assistance payments to the owner in accordance
with the HAP Contract, which payments will include any adjustments
of the Contract Rents provided thereunder.
If
a HAP Contract expires, neither HUD nor the project owner has any
contractual obligation to renew the agreement or to enter into a
new HAP Contract for the previously assisted units. If HUD elects
to provide additional assistance upon expiration of a HAP Contract,
HUD may provide such assistance pursuant to a new HAP Contract for
project-based assistance or for Section 8 vouchers or certificates
as hereinafter described. Prior to enactment in 1996 of the Balanced
Budget Down-payment Act, I (the "BBDA."), the Housing
Act required HUD, upon request of the project owner, to extend any
expiring LMSA HAP Contract or to enter into a new LMSA HAP Contract
with the owner. This requirement was repealed by the BBDA.
The
BBDA imposes certain new requirements concerning renewals of expiring
HAP Contracts. The BBDA requires HUD, at the request of the project
owner, to renew, for a period of one year, any project-based HAP
Contract that expires or terminates during fiscal year 1996 at the
Contract Rent levels in effect at the time of expiration or termination
of the agreement. However, HUD's discretion to renew such HAP Contracts
is subject to the availability of sufficient funds appropriated
by Congress for such purposes.
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