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HUD Section 8 Renewal Guide: What Investors Need to Know
Most properties under HUD's Section 8 program are governed under a housing assistance payment contract which typically lasts between five and 20 years. Find out how renewals under this program work.
- A Comprehensive Breakdown of the HUD Section 8 Renewal Guide
- Basic HUD Section 8 Terms
- The Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) and the Section 8 Program
- Owner Renewal Options for the Section 8 Program
- Section 8 Renewals and Early Contract Terminations
- Rent Comparability Studies (RCS) for HUD Section 8 Renewals
- Surplus Cash Distributions Under the Section 8 Program
- Related Questions
- Get Financing
A Comprehensive Breakdown of the HUD Section 8 Renewal Guide
The HUD Section 8 program is the Department of Housing and Urban Development’s (HUD’s) flagship housing assistance program. The program ays housing subsidies to private landlords for around 5 million low-income households throughout the United States, making it easier for the country’s least advantaged citizens to find safe and sanitary housing at a price they can afford. For landlords, the Section 8 program provides guaranteed monthly rental checks, as well as the ability to easily advertise to tenants on various online portals, eliminating (or greatly reducing) marketing costs.
Most Section 8 properties are governed under a Housing Assistance Payment (HAP) contract between HUD and the landlord. HAP contracts generally last between 5 and 20 years, with the majority being 20-year contracts. Most landlords are not obligated to renew their contract after it expires, but, in certain cases, some may be. However, renewing a HAP contract can be more complex than it seems, which is why HUD has created the HUD Section 8 Renewal Guide, which details all of a landlord’s options when it comes to the Section 8 renewal process. In this article, we’ll review some of the highlights of the guide in order to give you a better idea of how the process works.
Basic HUD Section 8 Terms
Before getting into more of the details of the Section 8 program, it’s important that readers understand a few terms, including:
MAHARA: The Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) and the Section 8 Program; is explained more thoroughly later in this article.
Market Up to Market: Known as MUTM, this HUD program involves changing the rental rates for expiring Section 8 properties to get them closer to market rents.
HUD Office of Recapitalizations: Also known as “Recap,” this is a division of HUD responsible for preserving affordable housing developments, and is often heavily involved in the Section 8 renewal and rental rate adjustment process.
Lite/Interim Lite: Short term renewal contracts, used when an owner has been referred to Recap (HUD’s Office of Recapitalizations) for a rent restructuring.
Option 1: Mark-Up-To-Market (MUTM) contract renewal, with current rents adjusted by an operating cost adjustment factor (OCAF) or calculated via budget:
If expiring contract rents are less than market, or:
If project owner’s contract contains a comparability adjustment within the 5-year term and the project is exempt from Recap restructuring.
Option 2: Contracts are renewed with previous rents
Option 3: Rents go to HUD’s Office of Recapitalization (Recap) for analysis if HAP rents exceed than market rents (only if project has a HUD-insured or HUD-held mortgage).
Option 4: Contract renewal for “exception projects.”
Option 5: Contract renewal for Portfolio Reengineering Demonstration projects, Budget-Based Without Mortgage Restructuring, and certain other preservation projects.
Option 6: Landlord/owner decides not to renew Section 8 HAP contract.
- For non-MAHRA Contracts: (older contracts that have not yet been renewed), landlords are permitted to terminate their contract early and renew them under MAHRA if:
They agree to a 20-year contract renewal under one of the first 4 options stated earlier in the article
They agree to the HUD Preservation Exhibit (explained in HUD Notice 2013-17), which means they are obligated to renew their MAHARA HAP contract after the initial 20-year period for a period equal to or greater than the term of their original terminated contract. Preservation Exhibit is not required for a contract with less than six months remaining.
They must also sign the HUD-93184 “Rider to Original Section 8 Housing Assistance Payments Contract.”
For MAHRA Contracts, early termination may be achieved if:
A Section 8 owner wants to renew the contract under MUTM (Mark Up to Market), Option 1
Option 2; signing a new 20-year contract
Option 3: Interim-Lite or Interim-Full M2M contract and HUD’s Office of Recapitalization (Recap) has finished processing prior to the date that the interim contract has expired.
Contacts that have previously undergone Lite contract renewal; and now are to undergo full Mark to Market (MTM) debt restructuring
Watch List contracts that meet certain requirements
A study remains valid of 5 years after certification by the owner’s appraiser
Before the end of the 5-year period, HUD account executives are required to let owners know that a new RCS is required, as the old one will expire (new RCS is needed for contract renewals and rent adjustments)
Each Section 8 unit type in a development needs to be mentioned in the RCS
An RCS will set rent for all contracts that will expire during the relevant 5-year RCS period
Contract administrators (CAs) can renew for 5-year periods, for longer periods, an account executive (AEs) must be involved in the process
Contracts must be at least 1-year, while Mark Up to Market (MUTM) contracts must be at least 5 years
For contracts with Use Agreements, a certain renewal option may be mandated. Renewals may not exceed the length of the Use Agreement, but the Use Agreement itself may be extended.
Section 8 Projects for the Elderly: Owners may receive a cash distribution of 6% of their original equity investment (at the time of project construction or substantial rehabilitation)
Non-Elderly Section 8 Projects: cash distribution of 6% of their original equity investment (at the time of project construction or substantial rehabilitation)
Non-Profit Projects Changing Ownership: If a project is owned by a nonprofit, but is then sold to a for-profit owner, the new owner will then be eligible to receive distributions.
Partially Assisted Projects: There are no limitations on the distributions owners may receive for the non-Section 8 units in partially assisted projects.
What are the requirements for HUD Section 8 renewal?
The requirements for HUD Section 8 renewal are outlined in the HUD Section 8 program and the Housing Assistance Payment (HAP) contract. The Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) requires that HUD-subsidized rents need to be similar to market rents in a project’s general area, and a rent comparability study (RCS) is often required. If a landlord decides not to renew their HAP contract, current Section 8 residents are given enhanced vouchers. These enhanced vouchers may pay more than typical vouchers in order to keep up with rent-increases. Section 8 residents may not be evicted as a result of contract non-renewal, except in the case of serious, repeated lease violations.
What are the benefits of investing in HUD Section 8 properties?
The HUD Section 8 Program offers several benefits for investors and borrowers alike. The major upsides of the program include:
- Regular Payments from HUD: Section 8 landlords can expect a regular payment from the U.S. government for each and every month that their unit is rented. Additionally, HUD will typically provide a rent increase of between 5-8% each year.
- Reduced Vacancy Issues: After getting approved for the Section 8 program, landlords are able to access a verified waiting list of Section 8 tenants in their area. Additionally, they can list their property on websites, which enables tenants to actually reach out to them in order to rent out their units.
- Reduced Capital Expenditures: Landlords generally don’t need to make the more common large capital investments in upgrading the property’s aesthetic nature when renting to Section 8 tenants.
For more information, please see The HUD Section 8 Program: A Guide for Apartment Loan Investors and Section 8 Investing: A Comprehensive Guide.
What are the risks associated with HUD Section 8 investments?
The HUD Section 8 Program offers a great opportunity for landlords, but it's not for everyone. There are some risks associated with HUD Section 8 investments, including bureaucracy and red tape, rent limits, tenant damages, no security deposits, and eviction challenges.
Bureaucracy and red tape can lead to delays in payments and errors in paperwork. Rent limits are based on the Fair Market Rent (FMR) for the specific area in which a property is located, and may not be as profitable as renting out units privately. Tenant damages can be an issue, as Section 8 tenants often have a bad reputation of being “careless”. Security deposits are not provided by the government, and Section 8 tenants often do not have enough money to pay for them. Lastly, eviction challenges can be difficult, as Section 8 tenants may not be held responsible for any damages they cause.
For more information, please see Section 8 Investing: A Comprehensive Guide and The HUD Section 8 Program: A Guide for Apartment Loan Investors.
How can investors maximize their return on HUD Section 8 investments?
Investors can maximize their return on HUD Section 8 investments by learning as much as possible about the program and its requirements. This includes understanding the wait times, bureaucracy and red tape, and the risk of obnoxious or challenging tenants. Additionally, investors should focus on properties that are older and have vacancy issues, as these are the properties that are most likely to benefit from the program. This guide and this guide provide more information on HUD Section 8 investments.
What are the differences between HUD Section 8 and other multifamily financing options?
HUD Section 8 financing offers longer loan terms and lower DSCR requirements than other multifamily financing options. Specifically, Freddie Mac's HUD Section 8 financing program offers 10- to 30-year loan terms for Low-Income Housing Tax Credit (LIHTC) properties and 5- to 15-year loan terms for non-LIHTC properties. Additionally, these loans have maximum loan-to-value (LTV) ratio allowances of up to 90% and minimum debt service coverage ratio (DSCR) requirements of as low as 1.15x (for LIHTC properties), and up to 80% maximum LTV allowances and as low as 1.20x DSCR (for non-LIHTC properties).
For more information, please visit Freddie Mac Multifamily Loans and Freddie Mac HUD Section 8 Multifamily Financing.
What are the steps involved in the HUD Section 8 renewal process?
The HUD Section 8 renewal process involves several steps, including:
- Determining whether or not to renew the HAP contract.
- If the landlord decides to renew, they must submit a request to HUD.
- HUD will then conduct a rent comparability study (RCS) to determine if rents need to be adjusted.
- If the landlord decides not to renew, current Section 8 residents are given enhanced vouchers.
For more information, please refer to the HUD Section 8 program and the HUD Section 8 Renewal Guide.
The Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) and the Section 8 Program
In 1997, the United States Congress enacted The Multifamily Assisted Housing Reform and Affordability Act (MAHRA), which stated that HUD-subsidized rents need to be similar to market rents in a project’s general area. This meant that, while some rents needed to be reduced, other rents needed to be raised. To determine which direction rents need to go in (if any), a rent comparability study (RCS) is often required.
If a landlord decides not to renew their HAP contract, current Section 8 residents are given enhanced vouchers. These enhanced vouchers may pay more than typical vouchers in order to keep up with rent-increases. Section 8 residents may not be evicted as a result of contract non-renewal, except in the case of serious, repeated lease violations.
Owner Renewal Options for the Section 8 Program
When a HAP contract has expired, an owner generally has six different options:
Most Section 8 owners will be dealing with Options 1,2,3, or 6, as Options 4 and 5 involve very specific HUD programs. Some options may be limited by a project’s eligibility at the exact date of their project expiration.
Section 8 Renewals and Early Contract Terminations
In some situations, a HUD Section 8 landlord may terminate their contract early to replace it with another type of Section 8 contract, but only under certain circumstances:
Rent Comparability Studies (RCS) for HUD Section 8 Renewals
Some Section 8 MAHRA renewal options require a Rent Comparability Study to be ordered, completed by a licensed appraiser, and presented to HUD. Chapter 9 of the HUD Section 8 Renewal Guide goes into detail about how this study must be done, as well as certain alternatives that may be used instead of an RCS. In addition:
Surplus Cash Distributions Under the Section 8 Program
In certain situations, for-profit HUD Section 8 owners may receive surplus cash distributions. New construction and substantial rehabilitation projects, however, are generally excluded. This distributions may be allowed in situations including:
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