Opposition Brief — United States v. Rainier View Associates

Supreme Court, U.S.

i ris @

: APR 15 1988

No. 88-1515

' JOSEPH F. SPANIOL, JR.

ees

IN THE 7

Supreme Court of the United States

OCTOBER TERM, 1988

UNITED STATES OF AMERICA, ACTING THROUGH

THE UNITED STATES DEPARTMENT OF HOUSING

AND URBAN DEVELOPMENT, PETITIONER

Vv.

RAINIER VIEW ASSOCIATES, A WASHINGTON LIMITED

PARTNERSHIP, KURTIS R. MAYER AND PAMELA MAYER,

D/B/A/ MAYER BUILT HOMES, RESPONDENTS

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

Warren J. Daheim

Counsel of Record

Donald W. Hanford

Gordon, Thomas, Honeywell,

Malanca, Peterson & Daheim

2200 First Interstate Plaza

P.O. Box 1157

Tacoma, WA 98401

(206) 572-5050

Counsel for Respondents

QUESTION PRESENTED

HUD’s statement of the question is argumentative and

misleading. It is argumentative because it states as true the

unfounded assumption that formula rent adjustments are

only “‘presumptive.’’ It is misleading because it implies that

the Ninth Circuit prohibited HUD from implementing the

overall limitation, which requires HUD to avoid adjustments

that result in material differences between Section 8 rents and

market rents.

The statute required HUD to select a rent adjustment

method that provides annual inflation/deflation ad-

justments. By contract HUD elected a formula method,

reserving the right to select and adjust the applicable factors

based on the overall limitation. Seven years later HUD began

selectively cutting existing rents using a project by project

market survey method. HUD claims that the overall limita-

tion gives HUD the right to substitute a project by project

method for the formula method elected in the contract.

As recognized by the Ninth Circuit, the true question is as

follows:

Does the overall limitation limit and qualify HUD’s

selection of the factors under the formula method

elected by HUD in the contract, or is it the source of an

independent project by project rent adjustment method?

(I)

TABLE OF CONTENTS

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TABLE OF AUTHORITIES

Cases:

Consumer Product Safety Commission v. GTE

Sylvania, Inc., 447 U.S. 102 (1980), n. 13........... 17

Statutes and regulations:

Housing Act of 1937, 42 U.S.C. 1437 et. seq.:

Sues a2 0... 1457fcK2)................. 9

24 C.F.R.:

ES 6

Miscellaneous:

H.R. Rep. No. 122, 100th Cong., Ist Sess. (1987) ...... 15

Section 8 Rent Adjustments, Elderly Housing, and

Other Assisted Housing Issues: Hearing Before the

Subcomm. on Housing and Community Develop-

ment of the House Comm. on Banking, Finance and

Urban Affairs, 98th Cong., 2d Sess. (1984) ......... 5

(II)

IN THE

Supreme Court of the United States

OCTOBER TERM, 1988

No. 88-1515

UNITED STATES OF AMERICA, ACTING THROUGH

THE UNITED STATES DEPARTMENT OF HOUSING

AND URBAN DEVELOPMENT, PETITIONER

ve

RAINIER VIEW ASSOCIATES, A WASHINGTON LIMITED

PARTNERSHIP, KURTIS R. MAYER AND PAMELA MAYER,

D/B/A/ MAYER BUILT HOMES, RESPONDENTS

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

The Respondents respectfully request that this Court

deny HUD’s petition for writ of certiorari.

OPINIONS BELOW

Early in this case, the Respondents moved the District

Court for summary judgment on the merits. Without oral

argument, and without prior notice to Respondents, the

District Court on its own granted summary judgment to

HUD. On appeal, by per curiam opinion, the Ninth Circuit

reversed the District Court and directed that summary

(1)

2

judgment be entered in favor of Respondents. On HUD’s

motion for an en banc rehearing, not one of the 26 Judges of

the Ninth Circuit requested a vote.

STATUTORY PROVISIONS INVOLVED

HUD correctly cites the provision of the 1974 Housing Act

which is involved. HUD’s reference to the 1988 amendment

to the statute is confusing. The amendment is not retroactive.

It is also irrelevant, except to argue that a hostile Congress

has somehow blessed HUD’s acknowledged mishandling of

rent adjustments.

STATEMENT OF THE CASE

HUD ’s latest description of the Section 8 program is an ex-

ercise in revisionist history. The undisputed record in this case

is largely misrepresented or ignored. Some statements are

flat-out wrong, and others are unsupported by the record. In-

stead of listing each misstatement, what follows is a balanced

summary of the Section 8 program as established by the

record.’

1. The Section 8 program was designed to provide

specialized housing for the elderly, handicapped, and poor in

specific “‘non-market’’ locations selected by HUD. HUD’s

rules and regulations increased operating costs and construc-

tion costs by over 50%. As a result, the rent levels subsidized

by HUD had to be and were substantially higher than so-

called market rents in order to induce the developers to con-

struct the housing.

' Respondents’ opening and reply briefs contain the citations to the record.

Sworn affidavits and deposition testimony were not contradicted by HUD.

3

2. The Section 8 program was designed to avoid the defects

of the disastrous Section 236 low income housing program.

Under the Section 236 program, low interest financing was

provided by the government and the developer’s profit was

limited. Rent adjustments were made on an individual proj-

ect by project basis according to operating costs. The project

by project rent adjustment system was an administrative

nightmare. It was expensive to process and time consuming to

both HUD and the developer. The system often worked on a

selective and arbitrary basis according to the HUD employee

administering the adjustment. Rejected and delayed rent ad-

justments resulted in deferred maintenance, cuts in services,

vacancies, and defaulted mortgages. Since the mortgages

were government insured, the developers simply walked away

from the projects, leaving HUD to foreclose.

3. The Section 8 program was designed to attract

developers who would use private sector financing; thereby

shifting the risk from the government to the developers and

lenders. As a trade-off for the additional risk, the developers’

profit would not be limited and the rent subsidies would be

adjusted annually for inflation. Congress authorized and

HUD elected an ‘‘automatic’’ inflation/deflation formula

rent adjustment method to be applied uniformly to projects

within the same geographical area. Automatic Annual Ad-

justment Factors and the geographical areas would be deter-

mined and published by HUD in the Federal Register on an

annual basis, with interim revisions permitted. The factors

would be a percentage figure to be applied against current

rents to produce the new rents. For example, if the inflation

factor is 5% and the current rents on an anniversary date are

$350 per month, the adjusted rents for the following year

would be 105% of $350, or $367 per month. Factors would be

positive (increasing current rents) or negative (decreasing cur-

rent rents). Separate factors would be selected and published

by HUD based on the geographical area, the number of

4

bedrooms, and the rent range. Each Section 8 project with

the same number of bedrooms and rent ranges in the same

geographical area would receive the same percentage adjust-

ment.

4. Developers and lenders relied on the factor adjustment

method in building housing and lending money under the

Section 8 program. The owners and lenders would not have

risked participation if a project-by-project rent adjustment

method was used.

5. The Section 8 statute required HUD to avoid rent ad-

justments that result in material differences between Section

8 rents and market rents (‘‘overall limitation’’). The contract

provided that the overall limitation could not be used to

decrease the initial difference between Section 8 rent and

market rents. In other words, the overall limitation requires

accurate inflation rent adjustments that maintain, without in-

creasing or decreasing, the initial relationship between Sec-

tion 8 rents and the market. During the first seven years of the

program, HUD implemented the overall limitation by using

market surveys to revise and fine tune the published factors

and narrow the geographical areas. _

6. In 1981, HUD suddenly began using individual project-

by-project ‘comparability studies’’ to drastically cut Section

8 rents without regard to its own published factors. HUD

justified the new system by reinterpreting the overall limita-

tion as the source of an alternative project-by-project rent

* HUD began its attempt to undo the initial relationship to the market by telling

owners their rents would be cut based on a ‘‘comparatibility study’’ between their

individual project and other projects arbitrarily selected by HUD. It used untrained

clerks to prepare the study without regulations, handbook provisions, or any other

standards or guidelines. The District Court has ruled three times (as recently as

December 24, 1987) in this litigation that HUD’s individual comparability method

produces arbitrary rent cuts in violation of due process. Footnote 6 of the Petition

falsely states that ‘‘HUD has now adopted comprehensive nationwide standards

and procedures.’’ The only ‘‘standards and procedures” are the same ones in ex-

istence prior to the District Court rulings.

5

adjustment method wholly separate and apart from the fac-

tor adjustment method. In other words, HUD decided the

tail should now wag the dog.

REASONS FOR DENYING THE PETITION

HUD’s Petition for certiorari should be denied because the

Ninth Circuit’s decision was clearly correct. The Petition is a

rehash of the same semantic arguments, misstatements, and

false charges rejected by the entire Ninth Circuit.

The Section 8 program was very successful and ran

smoothly from 1974 to 1981. The program attracted hun-

dreds of developers and lenders despite their reluctance to get

involved after the Section 236 fiasco. The initial rents were

negotiated between HUD and the developer, and the

developer received annual inflation adjustments based on the

factors published by HUD. HUD kept rents in line by

periodically monitoring the accuracy of the factors and

making adjustments upward or downward for local market

conditions.

In 1981, HUD completely changed the Section 8 rent ad-

justment system in an effort to unilaterally cut rent subsidies

to the developers who relied upon the factor adjustment

system provided by contract.* HUD’s pretext for changing

the system and cutting rents is the subject of this appeal.

3 With the same goal in mind, HUD adopted a regulation in 1983 imposing an

operating cost method for Section 8 rent adjustments, claiming the right to do so

under the Section 8 contract. The regulation was dropped after prompting the

following remarks from Chairman Gonzales:

“I recognize the Department is undoubtedly being directed to stick by its

guns through the orders of the Office of Management and Budget. But it is a

sorry day when any agency of the government, in the name of economy,

stands ready to corrupt contracts, vitiate and violate the law, and generally

operate in a style more appropriate to a small time dictatorship.’’ Section 8

Rent Adjustments, Elderly Housing and Other Assisted Housing Issues:

Hearing Before the Subcommittee on Housing and Community Develop-

ment of the House Committee on Banking, Finance and Urban Affairs, 98th

Congress 2d Sess. (1984).

6

The essence of HUD’s position is that a project by project

rent adjustment system is necessary to comply with the

overall limitation and avoid inaccurate inflation adjustments.

HUD’s attorney states that HUD ‘‘was doing nothing’’ (Peti-

tion, page 7) to comply with the overall limitation before 1981

because the factors were based solely on geographically

broad-based CPI figures, and not local market conditions. In

other words, HUD is saying that from 1974 to 1981 it forgot

about the overall limitation and did nothing but rubber stamp

the CPI, resulting in “‘windfall profits’’ to the developers.

As the Ninth Circuit recognized, HUD is flatly con-

tradicted by its own regulations, handbook, and memoran-

da, which have from the inception of the program provided

for fine tuning and adjusting the factors and geographical

areas based on local market conditions. HUD tries to explain

away the regulation (24 C.F.R. Section 888.204) by saying it

only deals with factor revisions where local market conditions

indicate the factor is too low.* HUD tries to explain away the

1978 Handbook,* which does call for a factor adjustment if

the factor is too high, by making the preposterous statement

that the handbook was ‘“‘never actually implemented’’ and

‘‘no AAAF was ever revised downward”’ from the CPI.

Prior to 1981, HUD’s methodology® for determining the

factors was described as follows:

* HUD claims the regulation is consistent with its interpretation because project

by project adjustments are only used when the factors are too high. This one-way

street approach is typical of HUD. The owner is stuck with trying to convince HUD

to revise the factor if the factor is too low, but HUD is free to ignore the factor and

use an individual comparability study if HUD says the factor is too high. The

remedy in both cases must be consistent — a factor adjustment.

* The Handbook provided as follows:

Pursuant to [the overall limitation], the AMA branch or the PHA shall

review the accuracy of the rent adjustments fo insure that it is comparable

(neither too high nor too low) in relation to similar assisted or unassisted

units. If the adjustment is not comparable, the AMA branch shall revise the

Factors in accordance with the revision procedures... .

* See Methodology, effective November 8, 1980, Appendix A, p.la.

7

Normally, these inflation factors are based on changes

in the CPI rent and utility indexes for the most recent 12

month period, but they may, for selected areas, be based

on changes in the CPI indexes for other time periods or

be adjusted to reflect rental market information derived

From any other data sources or market analysis.

In 1980, HUD counsel gave the following opinion:

The handbook should include a system for field offices

to check on whether the factors are resulting in correct

rent adjustments. This could include requiring field of-

fices to conduct a random sampling every two or three

years to assure that the factor is resulting in rents which

are comparable. Where the sample indicates problems

with the factor, steps should be taken to establish a

separate factor for a market area now included in one of

the broad census region categories or to correct the fac-

tor for one of the SMSAs for which an individual factor

is now published on a regular basis. This or another

system to assure that an owner is not being treated ar-

bitrarily must be established if HUD is to preserve its

ability to apply the overall limitation.

In 1981, HUD further refined the criteria for determining

the factors.’ As is readily apparent from glancing at the

Methodologies, the process for determining the factors is a

detailed and complicated ‘‘formuia’’ in which the CPI is only

one cOmponent, along with other indexes and a ‘‘market

analysis.’’ If a market analysis indicated the CPI is too high,

the factor was obviously set at a lower level than the CPI.

There can be no dispute that from the inception of the pro-

gram, HUD has implemented the overall limitation in deter-

mining the factors.®

” See Methodology effective November 8, 1981, Appendix B, p.4a.

* Even if it were true that HUD issued regulations, handbooks, and

methodologies and then ignored them, it does not change the fact that HUD had

every right to adjust the factors in accordance with the overall limitation. HUD is

apparently saying that the owners should lose their contract rights because HUD ig-

nored its own policies.

8

HUD complains that the geographical areas are “‘relatively

wide’’ and that the factors cannot protect against “‘economic

variations’ within an area. Of course this ignores the fact

that HUD selects the geographical areas. Since 1975, HUD

has increased the number of geographical areas three-fold. If

HUD’s market analysis indicated an ‘‘economic variation”’

HUD simply created a separate geographical area.

It is clear that before HUD invented the individual com-

parability method, HUD kept rents in line by using market

data to raise or lower the factors and narrow the geographical

areas. Now HUD wants to argue that its new individual com-

parability method is indispensable to keeping rents in line. It

does not and cannot explain how adjusting the factors and

geographical areas according to market surveys can possibly

fail to keep the rents in line. It does not offer any evidence

and none exists which indicates the factors selected by HUD

in fact failed to keep rents in line. HUD’s bald statements

about ‘‘wasteful subsidies’’ and ‘‘windfall profits’ are pure

demagoguery. There is not one shred of evidence in the

record to suggest that Section 8 rents are out of line with

market rents. The only ‘‘evidence’’ cited by HUD are the ar-

bitrary comparability studies conducted in violation of due

process (see Footnote 2). In other words, HUD wants to use

the results of an unconstitutional practice as evidence that its

own detailed process for determining the factors was

inaccurate.

Ninth Circuit Opinion.®

The Ninth Circuit based its decision on the plain language

of the statute and contract, and a practical understanding of

* In Footnote 9 of the Petition, HUD says that the en banc Ninth Circuit ruled

that it had jurisdiction because the case involved the statute ‘‘rather than the con-

tract.’’ This is not true. The Ninth Circuit held that the case rested ‘‘at bottom”’ on

the statute and regulations, not that the contract was irrelevant. The statute, regula-

tions, and contract were properly considered in the Ninth Circuit Opinion.

9

the Section 8 program and HUD’s administration of the pro-

gram during the years the developers agreed to participate.

The Ninth Circuit simply held that HUD must continue to

implement the overall limitation without making a mockery

out of the rent adjustment method HUD wrote into the con-

tracts. HUD’s distortions of the record and semantic

arguments failed to convince a single Judge that the per

curiam panel decision should be reheard en banc.

The Statute and Contract.

Sections 8(c)(2)(A) and (C) of the Housing Act, 42 U.S.C.

1437(f)(c)(2) provided as follows:

(2)(A) The assistance contract shall provide for adjust-

ment annually or more frequently in the maximum

monthly rents for units covered by the contract to reflect

changes in the fair market rentals established in the

housing area for similar types and sizes of dwelling units

or, if the Secretary determines, on the basis of a

reasonable formula.

* * * x *

(c) Adjustments in the maximum rents as hereinbefore

provided shall not result in material differences between

the rents charged for assisted and comparable unassisted

units, as determined by the Secretary.

Subsections b and d of paragraph 1.9 of the Section 8 con-

tract provide as follows:

Automatic Annual Adjustments.

(1) Automatic Annual Adjustment Factors will be deter-

mined by the Government at least annually; interim revi-

sions may be made as market conditions warrant. Such

factors and the basis for their determination will be

published in the Federal Register. These published Fac-

tors will be reduced appropriately by the Government

where utilities are paid directly by the Families.

10

(2) On each anniversary date of the Contract, the Con-

tract Rents shall be adjusted by applying the applicable

Automatic Annual Adjustment Factor most recently

published by the Government. Contract Rents may be

adjusted upward or downward, as may be appropriate;

however, in no case shall the adjusted Contract Rents be

less than the Contract Rents on the effective date of the

Contract.

* * «KC K

Overall Limitation. Notwithstanding any other provi-

sion of this Contract, adjustments as provided in this

section shall not result in material differences between

the rents charged for assisted and comparable unassisted

units, as determined by the Government; provided that

this limitation shall not be construed to prohibit differ-

ences in rents between assisted and comparable un-

assisted units to the extent that such differences may

have existed with respect to the initial Contract Rents.

Respondents’ position is simply stated. The statute gave

HUD the power to base rent adjustments on changes in

market rents in the housing area or a formula, as long as the

method selected would not result in material differences be-

tween Section 8 rents and market rents. Under the contract,

HUD elected a formula rent adjustment method based on the

automatic annual adjustment factors. In compliance with the

statute, HUD reserved in the contract the right to determine,

monitor and adjust the factors to avoid material differences.

HUD claims the overall limitation in the contract permits it

to use a project by project market survey method as an alter-

native to the factor method. In other words, HUD wants to

have the same broad discretion under the contract as it had

under the statute — to permit a market survey method or a

formula method. The contract could have but was not

11

written to permit both methods. If it had been, the program

would have been rejected by the private sector. HUD admits

it elected the factor method in the contract, but claims to have

reserved the right to use a project by project market survey in-

stead. HUD’s position is irreconcilable.

HUD emphasizés the overall limitation language stating

that:

‘‘Notwithstanding any other provision of this contract,

adjustments as provided in the section shall not result in

material differences. . .

Respondents agree with HUD that those words are clear.

They say that adjustments shall not result in material differ-

ences. Respondents also agree with HUD that the overall lim-

itation does not say how HUD is to avoid improper adjust-

ments. Respondents further agree with HUD that the statute

left it to HUD to determine how to avoid improper adjust-

ments. The point is that when HUD elected the factor method

in the contract, it did determine how improper adjustments

were to be avoided — by monitoring and adjusting the fac-

tors. HUD contracted in a manner consistent with and

authorized by the statute. It elected the method in the con-

tract and cannot change its mind seven years later and adopt a

different method.

HUD points to no contract language whatsoever to sup-

port its claim that a market survey method is an alternative to

the factor method. The contract provided for adjustments

based only on the published factors. It says nothing about ad-

justments based on a market survey method or any other

method. Plaintiffs interpret the overall limitation to qualify

HUD’s selection of the factors used in the formula adjust-

ment required under the contract. HUD interprets the overall

limitation language to nullify the factor adjustment in favor

of a totally different rent adjustment method not mentioned

in the contract.

12

As it did before the Ninth Circuit, HUD again strains the

language of the contract and statute to argue for a “‘two-step

process’ beginning with a ‘“‘general,’’ ‘“‘preliminary,”’

‘‘presumptive,”’ ‘‘threshold’’ factor adjustment, with the in-

dividual market survey method as a ‘“‘cap’’'® or “‘check’’ on

the factor adjustment. HUD’s argument is no easier to follow

now than it was before. While at the same time it says factor

adjustments and individual comparability under the two-step

process are complementary, it also says that its project by

project market survey method ‘“‘overrides’’ the factor

method. The Ninth Circuit recognized that HUD’s two-step

process is really nothing more than a one-step process which

substitutes a project by project rent adjustment method for

the formula rent adjustment method elected by HUD in the

contract. HUD’s project by project approach is contradicted

by the statute, the contract, the legislative history, and

HUD ’s original interpretation and administration of the Act.

HUD accuses the Ninth Circuit of confusing two different

‘‘market survey’? methods.'' It says this confusion led the

Ninth Circuit to incorrectly conclude that HUD’s market

survey method would nullify the factor method. This is a non

sequitur. If a market survey method, of whatever kind, is

‘© It should be clearly understood that HUD is not using individual market

surveys just to deny factor adjustments. HUD is using its unconstitutional market

surveys to cut rent levels established by factor adjustments in prior years. For exam-

ple, assume the owner received factor adjustments from 1974 to 1981, the current

rent level was $350 per month, and the factor for 1981 was 5% . If HUD’s individual

market study says the rent should be $275, it does not merely deny the 5% adjust-

ment, it reduces the rent from $350 to $275. This is exactly what happened to

Respondent Kurtis R. Mayer.

'' The Ninth Circuit was not confused. HUD’s explanation of the ‘‘market

survey option’’ is completely fabricated. Since that option was not selected, it has

never been defined nor published. Fair market rents, to the extent used to determine

initial rents, are detailed determinations of rent for specialized housing in precisely

determined areas (see 24 CFR §888.103(d) for determination of “data base’’).

13

used instead of the factor method, the market survey method

obviously has the effect of nullifying the factor method.'?

HUD also says the factor adjustment method is not nulli-

fied because the factors are used if its individual market study

produces a higher rent or no individual market study is per-

formed at all.'* Once again, HUD’s argument does not

follow. This appeal is not about owners who get their factor

adjustments. It is about those who do not get their factor ad-

justments because HUD used a different method. For them,

the factor method-is certainly nullified.'*

The system HUD invented in 1981 is nothing like a tax

audit. The comparison is frivolous. A tax audit tells whether

or not the taxpayer is following the law. The object is not to

subject those who are selected to a different system of taxa-

tion. HUD does not explain where it gets the authority to

individually audit and cut the rents produced by its own

detailed formula. If HUD’s market survey method were truly

an auditing process to see if the formula was accurate, the

results would be used to revise the formula, not replace it with

an entirely different system.

HUD’s only argument is and always has been that the

overall limitation creates a project by project market survey

method entirely independent and separate from the factor

method. The Ninth Circuit recognized that a limitation on the

‘? HUD gets caught up in its own semantics. In effect, HUD admits that the fac-

tor method is nullified by saying the individual comparability method ‘‘overrides”’

the factor method. ‘‘Override’’ and ‘‘nullify’’ are synonymous. Webster's New

World Dictionary Second College Edition (1979).

'* Without citing any evidence, HUD says that only 10% of the projects nation-

wide have been subjected to individual market studies. In its memoranda, however,

HUD requires a separate study for all projects showing a profit. Elsewhere in the

petition, HUD says comparability studies have been ‘‘enforced with a vengeance.”’

The fact is that the comparability method has been and is used widely as an in-

dependent method of rent adjustment.

* As pointed out in Footnote 10, HUD’s approach is also retroactive — it

nullifies past as well as present factor adjustments.

14

factor method cannot be construed to nullify the factor

method. The overall limitation limits, qualifies, and works

with the factor method. It does not replace the factor method

with a project-by-project approach similar to the discredited

Section 236 program.

The Section 8 Program.

The Section 8 Program was the Ford administration’s re-

sponse to the need for housing for the poor and elderly. The

object was to have the private sector build, finance, and

operate the housing in return for a profit. The rent adjust-

ment process selected by HUD to attract the private sector

was simple and fair. HUD would annually determine the per-

centage increase in inflation in a geographical area selected by

HUD, and the same increase would automatically be given to

all projects in the area. Unlike the project by project ap-

proach under the Section 236 Program, the owners would not

have to come in and argue with local HUD personnel every

year over their adjustments.

HUD?’s Administration of the Section 8 Program.

HUD’s statement that it has always had the same interpre-

tation of the overall limitation is purely and simply a bald

denial of reality, as shown by the undisputed record. For the

first seven years, HUD interpreted and administered the Sec-

tion 8 progran in exactly the same way mandated by the

Ninth Circuit. HUD’s regulations, handbook, and method-

ologies interpreted the overall limitation to require adjust-

ment of the factors area-wide according to market surveys. In

1981, HUD revised its long-standing interpretation and com-

pletely changed its administration of the rent adjustment

process. This lawsuit was filed in 1983 to challenge the new

process. The long standing interpretation was obviously

HUD’s original interpretation, not the new interpretation

that prompted the filing of this lawsuit.

15

The 1987 and 1988 Congress.

As HUD points out, Congress has been well aware of

HUD’s post-1981 administration of the Section 8 program.

Congress has specifically noted HUD’s track record of adopt-

ing strained and illogical interpretations to justify illegal and

unprincipled attacks on the Section 8 program. HUD has left

no stone unturned in its attempt to cut subsidies and kill the

program. This case is only one of those attacks (See Footnote

3).

The 1987 House Committee Report'® described HUD’s

post-1987 rent adjustment process as follows:

) When it enacted the Section 8 program, Congress in-

| tended that rents for project based assisted projects

) would be reduced only if the published Automatic An-

nual Adjustment Factor (‘“‘AAAF’’) was negative; re-

flecting a noticeable general down turn in rents in the

market area. Although no negative adjustment factors

have been published to date, HUD field offices have

been making capricious individualized rent reductions

nonetheless.

Faced with an agency gone wild, Congress changed the

statute to help prevent HUD’s abuses. HUD’s hypocritical'®

attempt to claim support from the actions of a hostile Con-

gress reminds one of the adage that ‘‘even the devil can quote

scripture to his advantage.’’ The only express reference to the

original intent of Congress fully supports the Ninth Circuit

and directly contradicts HUD’s post-1981 practice:

When it enacted the Section 8 program, Congress in-

tended that rents for project based assisted projects

would be reduced only if the published Automatic An-

nual Adjustment Factor (“‘AAAF’’) was negative. . .

"® See H.R. Rep. No. 122, 100th Cong., Ist Sess. (1987)

‘® As noted in the 1988 Hearings quoted in the text below, HUD refuses to follow

the 1987 amendment at the same time it attempts to use the amendment as support.

|

16

HUD on the other hand claims that individual comparability

can be used to cut rents without a negative factor. It is dif-

ficult to imagine a clearer and more direct refutation of

HUD’s position.

Congress was fed up with HUD’s tactics and generally pro-

hibited any rent cuts after April 15, 1987, even with a negative

factor. In 1988, HUD again defied Congress by not recogniz-

ing the cutoff date of April 15, 1987 and claiming the right to

cut rents with a negative factor. The 1988 Sub-committee

Report'’ responded as follows:

Nothing could be more convoluted and tortuous than

HUD ’s interpretation of. . . the 1987 Act which resulted

in a denial of the policy established by that law. HUD’s

interpretation rendered meaningless the April 15, 1987,

date chosen by Congress to trigger the prohibition

against certain Section 8 rent reductions.

For certain project-based Section 8 assistance programs,

the 1987 Act prohibited reduction in Section 8 rents in

effect on or after April 15, 1987, unless a reduction in

mortgage payments was the result of the project having

been refinanced. The House Committee report on this

provision explained that Congress believed that HUD

never had the legal right to reduce Section 8 rents in the

absence of a negative annual adjustment factor.

However, HUD ignored the Committee’s directive in the

report and made capricious individualized rent reduc-

tions in the absence of such negative factor. It is the in-

tent of Congress to take away HUD’s right to make rent

reductions absent of refinancing, regardless of whether

or not there was a negative factor...

‘7 H.R. Rep. No. 100-741, 100th Cong. 2d Sess. (1978).

17

Unfortunately, HUD has not seen fit to follow these

provisions in the 1987 Act; instead it has made the prohi-

bition on rent reductions effective from February 5,

1988, and not on April 15, 1987, as intended by Con-

gress, and has indicated that it will reduce rents if there is

a negative annual adjustment factor in contravention of

the intent of Congress to only permit such reductions

upon project refinancing. Section 602 of this Bill again

makes our intent clear on these issues and directs HUD

to pay to the owner the amount of lost rents that have

occurred because of the illegal reductions made after

April 15, 1987.

In summary, Congress and the Ninth Circuit are in com-

plete agreement. HUD was violating original congressional

intent by cutting rents without publishing a negative factor.

Comparability or market surveys can be used to revise fac-

tors, and even to select a negative factor, but they cannot be

used outside the automatic formula adjustment process that

was guaranteed to the developers and lenders in the contract.

HUD ignores these points and tries to direct the focus to a

relatively minor change requiring application of the auto-

matic annual adjustment factor if a ‘comparability study’’ is

not given to the project owner sixty days before the anniver-

sary date of the contract. As stated by HUD, the amendment

does assume that a ‘‘comparability study’’ can be used to

limit the factors. The issue, however, is how they are used,

which is not specifically addressed. To be consistent with the

committee reports, the comparability study would be used to

make an interim revision to the factor that would otherwise

apply.

In any event, the issue is not what Congress did in 1987 or

1988'* The issue is what Congress intended in 1974. The only

'* “The views of a subsequent Congress form a hazardous basis for inferring the

intent of an earlier one.’ Consumer Product Safety Commission v. GTE Sylvania,

Inc., 447 U.S. 102 (1980), n. 13.

18

express reference to original intent is in the 1987 and 1988

Committee Reports, both of which flatly contradict HUD’s

ratification argument.

The Public Interest.

HUD tries to posture this case as an attack on the treasury

by greedy landlords. HUD refers to wasteful subsidies and

windfall profits in an appea to passion rather than reason.

As HUD well knows, there is no evidence whatsoever to sug-

gest that Section 8 rents are out of line with market rents, ex-

cept its own unconstitutional and invalid individual market

studies. The affidavits filed in this case establish that HUD’s

rent cuts have put many projects in danger of foreclosure.

That certainly cannot be in the public interest.

Saving money is commendable, but not at the expense of

contractual rights and of the larger view of public interest.

Some may view the recent refusal of a federal pay raise as

commendable, but if as a result federal judges leave the bench

in droves, that can hardly advance the public interest. Like-

wise, giving a pay raise to federal judges to keep up with the

cost of living is hardly a “‘windfall,’’ although HUD’s attor-

neys would probably choose that characterization.

The fact is that if HUD kept its promises, the developers

might be inclined to stay in the program instead of abandon-

ing it when they have the opportunity, as is now the case. The

depletion of our already small inventory of housing for the

elderly, the handicappe, and the disadvantaged, cannot be

in the public interest.

HUD’s suggestion that low-income tenants will suffer a

loss unless HUD can abrogate its contracts is an affront to

common sense. As HUD knows, rent adjustments on what-

ever basis and whatever the result do not affect the tenant one

way or the other. Section 8 tenants pay a fixed percentage of

their income for rent, regardless of the amount of the rent.

However, failure to give an owner arent adjustment based on

19

the formula process does affect tenants. Owners are dropping

out of the program because HUD has turned the adjustment

process into a subjective and torturous exercise, similar to the

discredited process formerly used under Section 236.

In a more positive vein, some of the public interests sup-

ported by the Ninth Circuit’s decision are as follows:

1. The public interest was to have low income and elderly

housing constructed by the private sector. No rational person

would gave signed a Section 8 contract if HUD reserved the

right to determine adjustments on the basis of project by

project market studies conducted by local HUD personnel.

2. The public interest was to simplify the rent adjustment

process. HUD’s method is complex, time consuming, costly,

and subjective. Developers knew the problems with the Sec-

tion 236 program and would not have accepted it. HUD itself

wanted a simplified process and for that reason elected a

formula process.

3. Respondents built specialized housing, under specialized

construction standards, at specialized locations, for a special-

ized market, at the request of HUD. Those factors alone

resulted in housing that cost up to 50% more to build than so-

called ‘‘market’’ housing. Much of it was built when interest

rates exceeded 20%. Developers were encouraged to use

private financing and take the risk, in return for profits, using

a simplified rent adjustment process. HUD now wants to

renege on its contract. It cannot be in the public interest to

allow HUD to renege on its promises. Trust in government is

already an endangered commodity.

20

CONCLUSION

The Ninth Circuit decision is obviously correct. The overall

limitation limits HUD’s methodology for determining the

factors. It does not create an independent project by project

rent adjustment method. HUD offers no legitimate grounds

for reversing the Ninth Circuit decision, and the Petition

should be denied. Alternatively, the Court should grant cer-

tiorari and summarily affirm the Ninth Circuit.

Respectfully submitted,

GORDON, THOMAS,

HONEYWELL, MALANCA,

PETERSON & DAHEIM

By: /s/

Warren J. Daheim

Counsel of Record

Donald W. Hanford

Attorneys for Respondents

2200 First Interstate

Plaza P.O. Box 1157

Tacoma, WA 98401

(206) 572-5050

la

APPENDIX A

Methodology Used to Develop Automatic Annual

Adjustment Factors for the Section 8 Housing Assistance

Payments Program Effective November 8, 1980

Section 8(c)(2)(A) of the United States Housing Act of 1937, as

amended, specifies that an assistance contract made pursuant to

Section 8 shall provide for adjustments annually or more frequently

in the maximum monthly rents to reflect changes in the fair market

rentals, and further specifies, if the Secretary determines, that these

adjustments be made on the basis of a reasonable formula. Subpart

B of Part 888 of the Code of Federal Regulations established

general guidance in regard to the development and use of

Automatic Annual Adjustment Factors (AAFs), the manner of

publication, and the revision of factors for a particular area by

HUD Field offices.

Pursuant to the regulations, the Headquarters Economic and

Market Analysis Division produces Annual Adjustment Factors for

selected (currently 34) Standard Metropolitan Statistical Areas

(SMSAs) and the 4 Census Regions based on rent and utility infla-

tion factors developed from the ‘‘Rent, residential’ and ‘‘Fuel and

Other Utilities’? components of the Consumer Price Index for All

Urban Consumers (CPI(U)). Normally, these inflation factors are

based on changes in the CPI rent and utility indexes for the most re-

cent 12 month period, but they may, for selected areas, be based on

. changes in the CPI indexes for other time periods or be adjusted to

reflect rental market information derived from other data sources

or market analysis.

A single factor is developed for use in adjusting Contract Rents

(excluding utilities), and a matrix of 105 separate factors, reflecting

differences for various rent ranges and bedroom sizes, is developed

for adjustment of Contract Rents including all utilities (Gross

Rents). The following is an example of the format used to publish

the AAFs in the Federal Register:

2a

SECTION 8 HOUSING ASSISTANCE PAYMENT PROGRAMS

ANNUAL ADJUSTMENT FACTORS

SMSA: ANAHEIM-SANTA ANA-GARDEN GROVE, CA

MONTHLY 0 1 2 3 4+

GROSS RENT BEDROOMS BEDROOM BEDROOMS BEDROOMS BEDROOMS

UNDER $125 1.133 1.143 1.157 1.174 1.185

125-149 1.130 1.138 1.150 1.163 1.172

150-174 1.128 1.135 1.144 1.156 1.164

175-199 1.126 1.132 1.141 1.151 1.157

200-224 1.125 1.130 1.138 1.146 1.152

225-249 1.124 1.128 1.135 1.142 1.149

250-274 1.123 1.128 1.134 1.141 1.146

275-299 1.123 1.127 1.132 1.139 1.143

300-324 1.122 1.126 1.131 1.137 1.141

325-249 1.122 1.125 1.130 1.135 1.139

350-374 1.121 1.124 1.129 1.134 1.137

375-399 1.121 1.124 1.128 1.133 1.136

400-424 1.121 1.123 1.127 1.132 1.135

425-449 1.120 1.123 1.127 1.131 1.134

450-474 1.120 1.123 1.126 1.130 1.133

475-499 1.120 1.122 1.125 1.129 1.132

500-524 1.120 1.122 1.125 1.129 1.131

525-549 1.120 1.122 1.125 1.128 1.130

550-574 1.119 1.121 1.124 1.128 1.130

575-599 1.119 1.121 1.124 1.127 1.129

600 + 1.119 1.121 1.124 1.127 1.129

ANNUAL ADJUSTMENT FACTOR FOR CONTRACT RENT

(EXCLUDING UTILITIES) is 1.116

Development of AAFs for Contract Rents

(excluding utilities)

With two exceptions, the AAFs for Contract Rents (excluding

utilities) effective November 8, 1980 were developed on the basis of

rent inflation factors derived from the residential rent component of

the CPI for the 12-month period from April or May 1979 to April or

May 1980, depending on the month designated for data collection in

each market area.

3a

The inflation factor applicable to the San Francisco SMSA was

derived from the trend in the CPI rent index between August 1979

and April 1980, and the inflation factor for the Anchorage SMSA

was derived from the CPI trend between January 1980 and May

1980. The use of the different time periods for calculation of the in-

flation factors for the San Francisco and Anchorage SMSAs was

adopted to avoid questionable short-term fluctuations in the CPI

rent indexes for those areas.

A table indicating the rent inflation factors applicable to the 4

Census Regions and the 34 SMSAs for which CPI data currently is

available is attached.

The following example illustrates the development of the AAFs

for Contract Rents (excluding utilities) for the Anaheim-Santa Ana-

Garden Grove SMSA, which as indicated at the bottom of the

preceding table of Annual Adjustment Factors has been established

at 1.116:

CPI rent index May 1980 207.6

CPI rent index May 1979 186.0 — —

Development of AAFs for Contract Rents Including Utilities

(Gross Rents)

As indicated, a matrix of 105 separate factors, reflecting dif-

ferences for various rent ranges and bedroom sizes, is developed for

adjustment of Gross Rents.

The AAFs for Gross Rents effective November 8, 1980 were

developed on the basis of rent and utility inflation factors derived

from the residential rent, and fuel and utilities components of the

CPI. The rent inflation factors are the same as those used for the

development of the AAFs for Contract Rents (excluding utilities).

Estimates of utility costs by bedroom size established as part of the

Fair Market Rent schedules for Section 8 Existing Housing in 1979,

and two sets of utility inflation factors were used to develop the

utility portion of the AAFs for Gross Rents.

The most recent annual utility inflation factors reflect changes in

the fuel and utilities component of the CPI for the 12-month period

from April or May 1979 to April or May 1980. The utility inflation

4a

factors for the previous year generally reflect changes in the utilities

component of the CPI between April or May of 1978 and 1979; but,

for some areas, they may reflect changes for other time periods or

adjustments based on other data or market analysis. :

The estimates of utility costs by bedroom size for 1979, as deter-

mined from the Annual Housing Survey (AHS) national sample for

1977 updated to 1979 by use of the CPI national index for utilities,

are as follows:

Number of Bedrooms 0 1 2 3 4

Fuel and Utility Costs $20 31 47 66 79

A table indicating the rent and utility inflation factors applicable

to the 4 Census Regions and 34 SMSAs is attached.

The following example illustrates the development of one of the

105 factors in the matrix of adjustment factors for Gross Rents ap-

plicable to the Anaheim-Santa Ana-Garden Grove SMSA

(Monthly Gross Rent range of $225-249 and 2 Bedroom Unit):

The objective is to develop Annual Adjustment Factors reflect-

ing differences for various rent ranges and bedroom sizes.

Step 1. Calculate the mid-point of the selected Gross Rent range (to

be used to represent the Gross Rent for this rent range for

1980):

$249.99 - 225.00

2

Step 2. Update the utility cost for a 2 Bedroom Unit from 1979 to

1980 using the calculated utility inflation factor from the

attached table:

$47.00 x 1.1550 = $54.29 Utility component 1980

Step 3. Use the utility cost estimate for 1980 to calculate the rent

component of the mid-point rent as of 1980:

$237.50 — 54.29 = $183.21 Rent component 1980

Step 4. Update the utility cost for a 2 Bedroom Unit from 1980 to

1981 using the appropriate utility inflation factor from the

attached table:

$54.29 x 1.2010 = $65.20 Utility component 1981

= $12.50 $225.00 + 12.50 = $237.50

Sa

Step 5. Update the rent component of the mid-point rent from

1980 to 1981 using the rent inflation factor from the at-

tached table:

$183.21 x 1.1160 = $204.46 Rent component 1981

Step 6. Add the rent and utility components calculated in steps 4

and 5 to obtain a mid-point rent for 1981:

$65.20 + 204.46 = $269.66 Mid-point rent 1981

Step 7. Calculate the AAF for the 2 Bedroom Unit in the $225-249

rent range by dividing the mid-point rent for 1981 by the

mid-point rent for 1980:

$269.66

237.50

Checking the table of AAFs for Gross Rents for the Anaheim-

Santa Ana-Garden Grove SMSA reveals that the AAF for the 2

Bedroom Unit in the $225-249 rent range is given as 1.135 as

illustrated in the above example.

= 1.135 AAF for Gross Rent

Note: See attached table for Rent and Utility Inflation Factors.

6a

RENT AND UTILITY INFLATION FACTORS

Used to Develop Automatic Annual Adjustment Factors

Effective November 8, 1980

1980-1981 1979-1980 1980-1981*

SMSA CENSUS REGION _ RENT UTILITY UTILITY

CODE OR SMSA FACTORS FACTORS FACTORS

— — NORTHEAST 1.0740 1.2247 1.2500

—— NORTH CENTRAL 1.0790 1.1425 1.1550

—- SOUTH 1.0920 1.1266 1.1430

—— WEST 1.1060 1.1243 1.2070

360 ANAHEIM-SANTA ANA-

GARDEN GROVE 1.1160 1.1550 1.2010

380 ANCHORAGE 1.0030 1.0911 1.0900

520 ATLANTA 1.0720 1.0994 1.1160

720 BALTIMORE 1.0670 1.0583 1.1810

1120 BOSTON 1.0780 1.3229 1.2840

1280 BUFFALO 1.0540 1.1782 1.2420

1600 CHICAGO 1.0900 1.1328 1.1630

1640 CINCINNATI 1.1040 1.0860 1.1370

1680 CLEVELAND 1.0690 1.1789 1.1500

1920 DALLAS-FORT WORTH 1.0960 1.0560 1.0390

2080 DENVER-BOULDER 1.0970 1.1435 1.1630

2160 DETROIT 1.1000 1.1508 1.1340

2960 GARY-HAMMON-EAST CHICAGO 1.0900 1.1328 1.1630

3320 HONOLULU 1.1060 1.0398 1.1440

3360 HOUSTON 1.0600 1.2063 1.1530

378) KANSAS CITY 1.0630 1.1529 1.0410

4480 LOS ANGELES-LONG BEACH 1.1160 1.1550 1.2010

5000 MIAMI 1.1220 1.0936 1.1480

5080 MILWAUKEE 1.0800 1.1857 1.2270

5120 MINNEAPOLIS-ST. PAUL 1.0960 1.0700 1.1260

5600 NEW YORK 1.0660 1.1997 1.2100

5640 NEWARK 1.0660 1.1997 1.2100

5745 NORTHEAST PENNSYLVANIA 1.0580 1.1704 1.1890

6000 OXNARD-SIMI VALLEY-VENTURA __ 1.1160 1.1550 1.2010

6040 PATTERSON-CLIFTON-PASSAIC 1.0660 1.1997 1.2100

6160 PHILADELPHIA 1.0610 1.2368 1.2830

6280 PITTSBURGH 1.0680 1.1110 1.1280.

6440 PORTLAND 1.0730 1.2383 1.2940

6780 RIVERSIDE-SAN BERNARDINO 1.1160 1.1550 1.2010

7040 ST. LOUIS 1.1530 1.1204 1.0670

7320 SAN DIEGO 1.0900 1.1508 1.2700

7360 SAN FRANCISCO 1.0970 1.1275 1.1690

7600 SEATTLE-EVERETT 1.2070 1.2132 1.2840

8840 WASHINGTON 1.0860 1.1033 1.1460

* Dates indicated above for rent and utility factors apply to the period of use.

See the text of the AAF Methodology for references to data sources and dates.

Ta

APPENDIX B

Methodology Used to Develop Automatic Annual

Adjustment Factors for the Section 8 Housing Assistance

Payments Program Effective November 8, 1981

Section 8(c)(2)(A) of the United States Housing Act of 1937, as

amended, specifies that an assistance contract made pursuant to

Section 8 shall provide for adjustments annually or more frequently

in the maximum monthly rents to reflect changes in the fair market

rentals. This Section further specifies, if the Secretary determines,

that these adjustments can be made on the basis of a reasonable for-

mula. Subpart B of Part 888 of the Code of Federal Regulations

establishes general guidance in regard to the development and use

of Automatic Annual Adjustment Factors (AAFs), the manner of

publication, and the revision of factors for a particular area by

HUD Field Offices.

The methodology used by the Headquarters Economic and

Market Analysis Division to develop the November 8, 1981 AAFs is

based on a formula using the ‘‘Rent, residential’ and ‘‘Fuel and

Other Utilities’’ components of the Consumer Price Index for All

Urban Consumers (CPI(U)) as of June 1981, and data from the

1978 and 1979 Annual Housing Surveys (AHS) updated to 1982.

AAFs are developed for 37 Standard Metropolitan Statistical Areas

(SMSAs) and the four Census Regions. Two sets of factors are

developed; one for Contract Rents Including Highest Cost Utility,

and one for Contract Rents Excluding Highest “ost Utility. A

matrix of 50 separate factors, reflecting variations by rent ranges

and bedroom sizes, is developed for each set of factors. The step-

by-step procedures and the data used to develop the adjustments

factors are as follows:

(1) Calculation of the increases in the Rent and Utilities com-

ponents of the CPI for the most recent twelve-month period

(2) Calculation of a Shelter Rent increase factor by adjusting for

the units in the CPI Rent Index that include heating costs

8a

(3) Calculation of a single Gross Rent increase factor for each of

the 37 SMSAs and the four Census Regions by weighting the

Shelter Rent and Utility increases in accordance with Na-

tional and Census Regional weights derived from 1979 AHS

data

(4) Calculation of AAFs for Contract Rents Including Highest

Cost Utilities (Gross Rents) that reflect differences for rent

ranges and bedroom sizes developed_from 1978 and 1979

AHS data

(5) Calculation of AAFs for Contract Rents Excluding Highest

Cost Utilities (Shelter Rents) by development of shelter rents

for 1982 and 1981, and comparison of the 1982 rents with the

1981 rents

A detailed description of the step-by-step procedures and the

data used to develop the Automatic Annual Adjustment Factors

for both Gross Rents and Shelter Rents is given in the following

paragraphs:

An example of the AAF calculations for the Boston SMSA is

given following the description of the Methodology.

(1) Calculation of Rent and Utility Increase Factors Based on

CPI

Rent and Utility increase factors for the most recent twelve-

month period were calculated by dividing the most recent

Rent and Utility price index from the CPI by the index for

the same month one year earlier as shown in Table A below:

9a

Table A

Rent and Utility Increase Factors Based on Change in CPI

Census Region Survey _Rent Index increase _Util Index__— increase

or SMSA Month 1980 1981 Factor 1980 1961 Factor

Northwest Census Region June 117.1 126.3 1.0786 143.2 168.7 1.1781

| North Central Census Region June 119.4 127.7 1.0695 134.2 150.7 1.1230

South Census Region June 122.4 132.0 1.0784 127.0 144.9 1.1409

West Census Region June 125.9 138.7 1.1017 141.3 149.1 1.0552

Anaheim-Santa Ana-

Garden Grove, CA June 212.0 235.2 1.1094 233.9 250.9 1.0727

Anchorage, AK May = _ 157.8 165.9 1.0513 194.7 217.9 1.1192

Atlanta, GA June 166.6 187.8 1.1273 259.9 276.9 1.0654

Baltimore, MD May 172.9 187.7 1.0856 266.4 309.1 1.1603

Boston, MA May 194.4 218.7 1.1250 312.8 380.7 1.2171

Buffalo, NY June 176.7 184.7 1.0453 346.4 408.6 1.1796

Chicago, IL June 172.3 183.8 1.0667 253.8 285.0 1.1229

i Cincinnati, OH-KY-IN May 168.9 184.9 1.0947 287.5 318.9 1.1092

: Cleveland, OH June 169.1 178.3 1.0544 279.4 321.5 1.1507

. Dallas-Fort Worth, TX June 188.8 207.9 1.1012 243.6 305.9 1.2557

Denver-Boulder, CO May 182.9 201.2 1.1001 243.0 276-7 1.1387

Detroit, MI June 194.3 204.7 1.0535 294.9 335.6 1.1380

: Gary-Hammond-East Chicago, IN June ‘172.3 183.8 1.0667 253.8 285.0 1.1229

i Honolulu, HI June 205.6 229.1 1.1143 237.6 334.9 1.4095

' Houston, TX June 181.2 196.7 1.0855 317.2 377.2 1.1892

; Jersey City, NJ June 200.7 216.0 1.0762 316.5 375.3 1.1858

; Kansas City, MO-KS June 162.4 172.2 1.0603 265.3 299.0 1.1270

; Los Angeles-Long Beach, CA June 212.0 235.2 1.1094 233.9 250.9 1.0727

Miami, FL May 121.9 141.6 1.1616 119,8 142.9 1.1928

i Milwaukee, WI May 178.4 193.3 1.0835 293.1 339.1 1.1569

Minneapolis-St. Paul, MN-WI June 195.2 215.0 1.1014 266.9 320.3 1.2001

/ Nassau-Suffolk, NY June 200.7 216.0 1.0762 316.5 375.3 1.1858

New Brunswick-Perth Amboy- 4 exh

| Sayreville, NJ June 200.7 216.0 1.0762 316.5 375.3 1.1858

New York, NY June 200.7 216.0 1.0762 316.5 375.3 1.1858

: _ Newark, NJ June 200.7 216.0 1.0762 316.5 375.3 1.1858

Northeast Pennsylvania, PA May 217.7 227.4 1.0446 348.0 412.7 1.1859

Oxnard-Simi Valley-Ventura, CA June 212.0 235.2 1.1094 233.9 250.9 1.0727

Patterson-Clifton-Passaic, NJ June 200.7 216.0 1.0762 316.5 375.3 1.1858

Philadelphia, PA-NJ June 194.1 208.4 1.0737 292.3 345.0 1.1803

Pittsburgh, PA June 185.9 199.4 1.0726 247.4 272.8 1.1027

Portland, OR-WA May 200.3 215.7 1.0769 317.3 357.6 1.1270

Riverside-San Bernardino-

Ontario, CA June 212.0 235.2 1.1094 233.9 250.9 1.0727

St. Louis, MO-IL May _166.1 177.6 1.0692 228.4 245.4 1.0744

San Diego, CA May 221.2 243.4 1.1004 220.4 259.8 1.1788

i San Francisco-Oakland, CA June 212.8 233.2 1.0959 321.0 309.9 1.0000

: Seattle-Everett, WA May 225.3 240.7 1.0684 264.5 298.0 1.1267

Washington, DC-MD-VA May 194.7 213.4 1.0960 252.5 287.6 1.1390

Leland Sn ee B RE +

a

10a

(2) Calculation of a Shelter Rent Increase Factor

(a)

(b)

The residential rent component of the CPI is based on a

sample of about 18,000 rental units. The rental data for

some of the units in each of the areas surveyed includes the

cost of heating. To calculate a Shelter Rent increase factor

for each of the 37 SMSAs and the four Census Regions for

which the CPI data was available, it was necessary to

eliminate the cost of heating from the Rent component of

the CPI, and this was accomplished by the use of the

following formula:

I= A(CR + DU) + B(R)

(Solve for R to find Shelter Rent increase)

I= CPI residential rent increase factor

A = Percentage of rental units in the CPI sample that

included the cost of heating

B = Percentage of rental units in the CPI sample that did

not include the cost of heating

C= The ratio of Shelter Rent to Gross Rent

D = The ratio of Utilities to Gross Rent

R= Shelter Rent increase factor

U = CPI Utility increase factor

The ratio of Shelter Rent and the ratio of Utilities to Gross

Rent used in the above formula were derived from 1979

AHS data. The weight given to Shelter Rent was 70 percent,

and the weight given to Utilities was 30 percent for all

SMSAs, the North Central, South, and West Census

Regions. The weights were 67 percent and 33 percent for

the Northeast Census Region. The percentage of units in

the CPI rental survey that included the cost of heating, and

the Shelter Rent increase factors calculated by use of the

preceding formula are shown in Table B below.

lla

(3) Calculation of a Gross Rent Increase Factor

(a) A single Gross Rent increase factor for each of the 37

SMSAs and the four Census Regions was calculated by

weighting the percentage increase in Shelter Rent and the

percentage increase in Utilities in accordance with the

weights derived from the 1979 AHS as given in paragraph

(2)(b) above. The formula used for the calculation was as

follows:

G= A(R) + B(U)

(Solve for G to find Gross Rent increase)

G = Gross Rent increase factor

A = Weight applicable to Shelter Rent

B = Weight applicable to Utilities

R = Percentage increase in Shelter Rent

U = Percentage increase in Utilities

(b) The Gross Rent factors are shown in Table B below.

12a

Table B

Percentage of rental units in the CPI rental survey that included the

cost of heating, calculated Shelter Rent increase factor,

and calculated Gross Rent increase factor for four Census Regions

and 37 designated SMSAs

Percent Shelter Gross

Census Region of Units Rent Rent

or SMSA With Heat Factor Factor

Northwest Census Region 44.5 1.061 .0999

North Central Census Region 38.1 1.063 .0807

South Census Region 20.9 1.074 .0943

West Census Region 21.6 1.105 .0900

Anaheim-Santa Ana-Garden Grove, CA 123 1.111 .0994

Anchorage, AK 58.1 1.037 .0616

Atlanta, GA sg By 1.131 -l111

Baltimore, MD 34.9 1.077 -1019

Boston, MA 46.9 1.110 .1421

Buffalo, NY 22.2 1.036 .0789

Chicago, IL $17 1.056 .0610

Cincinnati, OH-K Y-IN §2.7 1.092 .0971

Cleveland, OH 36.6 1.043 -0750

Dallas-Fort Worth, TX 36.7 1.082 .1341

Denver-Boulder, CO 33.7 1.087 -1026

Detroit, MI 42.3 1.041 0702

Gary-Hammond-East Chicago, IN wat 1.056 0763

Honolulu, HI 00.0 1.000 .1229

Houston, TX 41.8 1.071 .1063

Jersey City, NJ 64.3 1.050 0908

Kansas City, MO-KS 25.6 1.055 .0764

Los Angeles-Long Beach, CA 12.5 1.111 .0994

Miami, FL 23 1.161 .1708

Milwaukee, WI 35.0 1.075 -0995

Minneapolis-St. Paul, MN-WI 34.7 1.090 1230

Nassau-Suffolk, NY 64.3 1.050 0908

New Brunswick-Perth Amboy-

Sayreville, NJ 64.3 1.050 -0908

New York, NY 64.3 1.050 .0908

Newark, NJ 64.3 1.050 -0908

Northeast Pennsylvania, PA 26.5 1.032 .0785

Oxnard-Simi Valley-Ventura, CA 12.5 1.111 .0994

Patterson-Clifton-Passaic, NJ 64.3 1.050 -0908

Philadelphia, PA-NJ 58.0 1.051 0899

Pittsburgh, PA 39.4 1.069 .0788

Portland, OR-WA 14.3 1.075 .0904

Riverside-San Bernardino-Ontario, CA 12.5 1.111 .0994

St. Louis, MO-IL 21.0 1.069 0705

San Diego, CA 6.8 1.099 .1228

San Francisco-Oakland, CA 8.6 1.098 -0689

Seattle-Everett, WA | 1.066 .0843

Washington, DC-MD-VA 55.5 1.088 .1030

13a

(4) Calculation of AAFs for Contract Rents Including Highest

Cost Utilities

(a)

(b)

(c)

The distribution of all rental units covered in the 1979 AHS

national sample shows that the 1978 to 1979 median percen-

tage increases in gross rents declines at subsequently higher

rent intervals. The data also suggest that the percentage in-

crease at each rent level rises as the number of bedrooms in-

creases. The actual distribution of units and the rent in-

creases taken directly from the AHS data are shown in

Table C.

Increases for all rent intervals and bedroom sizes could not

be obtained directly from the AHS data because of the

small number of cases in the survey sample. This was

especially true in regard to the number of efficiency and

four-bedroom units. Estimated distributions were made in

these categories to develop a complete matrix covering all

rent ranges and bedroom sizes. The complete matrix is

shown in Table D.

Intermediate adjustment factors necessary to complete a

matrix of percentage rent increases based on the single

Gross Rent factor and the variations shown for rent ranges

and bedroom sizes were delivered by dividing the factors in

Table D by 6.5 percent, which is the overall rent increase

from the 1979 AHS sample of rental units matched in 1978

and 1979. The intermediate adjustment factors developed

by this procedure are shown in Table E.

(d) The intermediate adjustment factors in Table E were up-

dated to 1982 by increasing the 1978 rent levels by 33.3 per-

cent, which was the median rent increase for the four-year

period. The updated factors necessary to compute per-

centage rent increases in Gross Rents by rent range and bed-

room size based on the single Gross Rent factor developed

for the most recent twelve-month period are shown in Table

r.

(e)

—_—_————

l4a

The AAFs for Contract Rents Including Highest Cost Utli-

ty applicable to each Census Region and the 37 designated

SMSAs were calculated by multiplying the single Gross

Rent increase factor developed for each area in Step (3) by

the intermediate adjustment factors shown in Table F, and

adding 1 to the result.

Tables C, D, E, and F are shown following the description of

Step (5) below:

(5) Calculation of AAFs for Contract Rents Excluding Highest

Cost Utilities

(a)

(b)

(c)

The AAFs for Contract Rents Excluding Highest Cost

Utility were calculated by developing a 1982 shelter rent for

each $50 rent interval, and then dividing the 1982 shelter

rent by the mid-point of the rent interval, which represents

the 1981 shelter rent to be adjusted.

The 1982 shelter rents were developed in a series of steps by

(1) calculating 1981 utility costs for each bedroom size unit,

and then adding the utility cost to the mid-point of each

rent interval to obtain 1981 gross rents, (2) calculating a

1982 gross rent by applying the appropriate AAF for gross

rent, and (3) calculating 1982 utility costs, and then sub-

tracting the utility cost from the gross rent.

The 1981 utility costs were calculated by updating 1979

utility costs for each Census Region derived from the AHS.

The 1979 costs were increased by 21 percent, which was the

overall utility increase indicated by the CPI. 1982 utility

costs were calculated by updating the 1981 costs by the utili-

ty increase factor for each Census Region and SMSA

shown in Table A. The 1979 utility costs from the AHS that

were used in the preceding calculations were as follows:

AREA 0-BR 1-BR 2-BR 3-BR 4-BR

Northeast Census Region 50 65 80 95 110

North Central Census Region 35 50 65 80 95

South Census Region 35 50 65 80 95

West Census Region 30 40 50 60 70

=

Se BEE Ny SURG A ne nS et

Se a EN a AN

15a

TABLE C

Median percentage change in Gross Rent from 1978 to 1979 and

number of cases in sample, by rent range and bedrooms where

number of cases exceeds 100 units.

Gross Rent 0 bedrooms 1 bedroom 2 bedrooms 3 bedrooms 4 bedrooms

in1978 % = Units % ~=90 Unit 32% ~=—0 Unit 3S % = Unit 32% ~—— Unit

lessthan $100 12.5 100 12.2 302. «12.1 260

$100 to 149 8.0 138 7a 751 102 76 89 201

180to199 = 7.8 = 133 of 109 71 103 74° SS

200 to 249 7.0 92) - BA 1526: 48 400

250 to 299 pa 461 5.5 941 6.9 268

300 to 349 4.8 1344 )=—5.0 459 5.3 232

350 to 399 4.5 179 4.2 143

400 to 449 4.9 111

450 or more

Note: Median percentage increase was 6.5 percent.

1/ Sample less than 100 units for each rent interval.

Source: 1978 and 1979 Annual Housing Survey, U.S. Summary (preliminary).

TABLE D

Estimated percentage change in gross rent from 1978 to 1979 by

rent range and bedrooms based on Table C.

Gross Rent 0 bedrooms 1 bedroom 2 bedrooms 3 bedrooms 4 bedrooms

in 1978 % % % % %

less than $150 7.4 7.9 8.4 8.9 9.4

150 to 199 6.5 6.8 7.1 7.4 ye

200 to 249 5.6 5.9 6.2 6.5 6.8

250 to 299 4.9 a 5.3 5.8 6.0

300 to 349 4.3 4.6 4.9 52 a0

350 to 399 3.8 4.1 4.4 4.7 5.0

400 to 449 3.4 VY | 4.0 4.3 4.6

450 or more | 3.4 FY | 4.0 4.3

Source: Estimated by EMAD, based on AHS.

l6a

TABLE E

Adjustment factors to be applied to median percentage increase in

gross rent.

Gross Rent 0 bedrooms 1 bedroom 2 bedrooms 3 bedrooms 4 bedrooms

in 1978 % % % % %

less than $150 1.1385 1.2154 1.2923 1.3692 1.4462

150 to 199 1.0000 1.0462 1.0923 1.1385 1.1846

200 to 249 .8615 .9077 .9538 1.0000 1.0462

250 to 299 -7538 .8000 8462 .8923 92331

300 to 349 .6923 .7077 .7538 .8000 .8462

350 to 399 5846 6307 6769 7231 .7692

400 to 449 5231 5692 6154 6615 .7077

450 or more .4769 5231 5692 6154 6615

Note: Factors developed from Table D for application to current CPI median gross rent

percentage increase factor.

TABLE F

Adjustment factors updated to 1982 for application to percentage

increase in gross rent developed for each Census Region and SMSA

in Step (3) of AAF Methodology.

Gross Rent 0 bedrooms 1 bedroom 2 bedrooms 3 bedrooms 4 bedrooms

in 1982

less than $200 1.1385 1.2154 1.2923 1.3692 1.4462

~ 200 to 249 1.0346 1.0962 1.1877 1.2193 1.2808

250 to 299 -9306 97710 1.0231 1.0693 1.1154

300 to 349 -8422 -8885 9347 9808 1.0193

350 to 399 .7538 -8000 8462 8923 9231

400 to 449 6962 .7423 -7885 8346 8693

450 to 499 6385 6846 7308 .7769 8154

500 to 549 5808 6269 6731 .7192 -7616

550 to 599 5231 5692 6154 6615 7077

600 or more 4769 5231 5692 6154 6615

Note: The factors in Table F which reflect differences for rent ranges and bedroom sizes were

applied to the single gross rent factor developed in Step (3) of the AAF Methodology to deter-

mine the AAFs for Contract Rents Including Highest Cost Utilities.

stein,

Pa Bo Kieren sata ae sale ni ee aS

Sicha OO

+ easechabe tee,

(1)

(2)

(3)

(4)

(5)

17a

Example of Methodology Used for Calculation of AAFs

as of Nov. 8, 1981

Boston, MA Standard Metropolitcan Statistical Area

Calculation of Rent and Utility Increase Factors Based on CPI

CPI Rent Index 1981. = Rent Increase 218.7 = 1.1250

CPI Rent Index 1980 Factor 194.4

CPI Utility Index 1981 ~ — Utility Increase 380.7 = 1.1271

CPI Utility Index 1980 Factor 312.8

Calculation of a Shelter Rent Increase Factor

I = A(CR + DU) + B(R) (See Methodology for identification of symbols)

_I-ADU 1,125 — (.469)(.30)(1.2171) ;

R=ic+B. =~ ~(460y.70)+.531 te

Calculations of a Gross Rent Increase Factor

G = A(R) + BU) (See Methodology for identification of symbols)

G = .70(.1100) + .30(.2171) G = .0770 + .0651 G =.1421

Calculation of AAFs for Contract Rents Including Highest Cost Utility

Gross Rent Increase Factor * Adjustment factor from +1=AAF

developed in Step(3)above “ Table F for each rent interval =

(.1421)(1.1385) +1 =1.162 | Calculated AAF for less than $200 rent interval

(.1421(1.0346) + 1 = 1.147 Calculated AAF for $200-249 rent interval

(Note: These examples are for the 0-Bedroom AAFs)

Calculation of AAFs for Contract Rents Excluding Highest Cost Utility

1979 Utility Cost for 0-BR unit Northeast Census Region

From AHS $50

Increase in Utility Cost from 1979 to 1981 U.S. from CPI x 1.21

1981 Utility Cost for 0-BR unit ; $61

Increase in Utility Cost from 1981 to 1981 Boston SMSA

from CPI x 1.2171

1982 Utility Cost for 0-BR unit in Boston SMSA $74

Mid-point of rent interval under $200 (1981 Shelter Rent) $175

Plus 1981 Utility Cost + 61

1981 Gross Rent $236

Multiply by AAF for Gross Rent at the $200-249 rent interval x 1.147

1982 Gross Rent $271

Minus 1982 Utility Cost - 74

1982 Shelter Rent $197

1982 Shelter Rent _ AAF for Contract Rents Excluding Highest $197 _ 1.126 AAF

1981 Shelter Rent Cost Utility (0-BR under $200 interval) $175

(Note: Approved AAF is 1.130 — difference is attributable to computer rounding)