Section 8 Moderate Rehabilitation; Rent Adjustments; Annual and Special Adjustments; Comparability Studies; Rent Reductions

SUMMARY: This proposed rule would revise the current regulations on

adjusting Section 8 Moderate Rehabilitation Contract Rents. The rule

would modify the method used by Public Housing Agencies (PHAs) to

determine the amount of the annual increase in the Contract Rents by

providing for PHAs to conduct comparability studies for Moderate

Rehabilitation projects to prevent the application of the Annual

Adjustment Factors from resulting in a material difference between

rents charged for assisted units and similar unassisted units. The

proposed rule provides a substitute method of determining the initial

difference between Moderate Rehabilitation rents and rents charged for

comparable unassisted units, if the PHA failed to establish the amount

of the difference when the initial Contract Rents were determined. The

proposed rule also provides, subject to the availability of

appropriations, for special adjustments when an exemption from real

property tax expires under certain circumstances. The proposed rule

also adds insurance to the categories of cost increases that may result

in a special adjustment.

DATES: Comment Due Date: December 1, 1995.

ADDRESSES: Interested persons are invited to submit comments regarding

this proposed rule to the Rules Docket Clerk, Office of General

Counsel, room 10276, Department of Housing and Urban Development, 451

Seventh Street SW, Washington, DC 20410. Communications should refer to

the above docket number and title. Facsimile (FAX) comments are not

acceptable. A copy of each communication submitted will be available

for public inspection and copying during regular business hours.

FOR FURTHER INFORMATION CONTACT: Madeline Hastings, Rental Assistance

Division, Room 4226, Department of Housing and Urban Development, 451

Seventh Street SW, Washington, DC 20410; telephone (202) 708-2841

(voice) or (202) 708-4594 (TDD). (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

The information collection requirements contained in this proposed

rule have been submitted to the Office of Management and Budget (OMB)

for review under the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-

3520). No person may be subjected to a penalty for failure to comply

with these information collection requirements until they have been

approved and assigned an OMB control number. The OMB control number,

when assigned, will be announced by separate notice in the Federal

Register.

The public reporting burden for each of these collections of

information is estimated to include the time for reviewing and

instructions, searching existing data sources, gathering and

maintaining the data needed, and completing and reviewing the

collection of information. Information on the estimated public

reporting burden is provided under the preamble heading, Other Matters.

Send comments regarding this burden estimate or any other aspect of

this collection of information, including suggestions for reducing this

burden, to the Department of Housing and Urban Development, Rules

Docket Clerk, 451 Seventh Street SW, Room 10276, Washington, DC 20410;

and to the Office of Information and Regulatory Affairs, Office of

Management and Budget, Attention Desk Officer for HUD, Washington, DC

20503. At the end of the public comment period on this rule, the

Department may amend the information collection requirements set out in

this rule to reflect public comments or OMB comments received

concerning the information collection.

II. Background

A. Applicability

This proposed rule would be applicable to all projects which are

currently, or will be in the future, under a Section 8 Moderate

Rehabilitation Housing Assistance Payments (HAP) Contract, as provided

in the regular Section 8 Moderate Rehabilitation Program, and the

Section 8 Moderate Rehabilitation Single Room Occupancy (SRO) Program

for Homeless Individuals. This rule proposes to revise the current

regulations in 24 CFR part 882, subpart D, that govern the special

procedures for adjusting Contract Rents of regular and SRO Moderate

Rehabilitation projects during the term of the HAP Contract. The

procedures for both annual and special rent adjustments would be

revised by the rule. These are the only upward adjustments to the

initial base and Contract Rents set forth in the HAP Contract that are

allowed during the term of the HAP Contract. Downward adjustments due

to changes in project financing are also permitted during the term of

the HAP Contract.

Regulations governing annual and special rent adjustments for the

other Section 8 Programs have been and will be addressed by separate

rulemaking. A proposed rule, entitled ``Annual Adjustments of Contract

Rents for Section 8 Assisted Housing; Comparability Studies,'' was

published in the Federal Register on October 29, 1992 (57 FR 49120).

The Department received considerable public comment on the October 29,

1992 proposed rule, and, as a result of this public comment, is further

considering its October 29, 1992 proposal. Accordingly, the language of

this proposed rule which is limited to the Section 8 Moderate

Rehabilitation Program and which would make similar amendments to those

amendments proposed to be made by the October 29, 1992 rule is not

based on the language of the October 29, 1992 proposed rule.

Additionally, the Department notes that 24 CFR part 888, subpart B,

does not apply to the process utilized under the Section 8 Moderate

Rehabilitation Program. Although subpart B currently applies to all

Section 8 Housing Assistance Programs, its scope is limited to the

Automatic Annual Adjustment factors. The Section 8 Moderate

Rehabilitation Program does not utilize automatic adjustments and,

therefore, adjustments will be made in accordance with Sec. 882.410,

not 24 CFR part 888, subpart B.1

\1\ Another proposed rule applicable to the section 8

regulations and entitled ``Section 8 Certificate and Voucher

Programs Conforming Rule'' was published on February 24, 1993 (58 FR

11292).

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B. Comparability Studies

This proposed rule would implement section 801(c) of the Department

of Housing and Urban Development Reform Act of 1989 (Pub. L. 101-235,

approved December 15, 1989) (HUD Reform Act), by providing for PHAs to

conduct comparability studies for Moderate Rehabilitation projects to

prevent a material difference between

[[Page 51659]]

rents charged for assisted units and similar unassisted units. The rule

also would revise 24 CFR 882.410 to provide that upon request to the

PHA by the Moderate Rehabilitation owner (Owner) to the PHA for an

annual adjustment, a comparability study may be conducted to ensure

that the application of the Annual Adjustment Factor (AAF) would not

result in a new Contract rent that is materially different from the

rents charged for comparable unassisted units. HUD will prescribe

procedures on how a comparable rent shall be determined.

Under the proposed rule, when the application of the AAF to the

base rent, plus the monthly rehabilitation debt service and utility

allowance, produces an amount which is 110 percent or more of the most

recently published Fair Market Rents (FMRs) for Existing Housing or

exception rent approved by HUD, a comparability study would be

conducted by the PHA. The Owner would be given notice of the PHA's

intent to conduct a comparability study within a limited timeframe.

Where the results of the PHA's comparability study show that a material

difference would result between the adjusted Contracts Rents and rents

being charged for similar unassisted units, allowing for any difference

which may have existed with respect to the initial Contract Rent (see

Section D of this preamble), the Contract rent would be set at the

maximum allowable Contract rent (which will be defined later in this

preamble). However, the Contract Rent would be reduced below its

current level based upon the comparability study.

A material difference between the assisted and comparable

unassisted rents exists if the adjusted base rent is greater than the

maximum allowable Contract rent plus any amount attributable to an

initial difference. The maximum allowable base rent is a dollar amount

equal to 105 percent of the comparable rent.

The rule also would provide that Contract Rents will never be

reduced as a result of a comparability study. Contract rents may be

reduced when the project has been refinanced in such a manner that the

periodic payment of the Owner has been reduced. The Owner is required

to notify the PHA of any refinancing that occurs during the term of the

HAP Contract.

C. Initial Difference

In determining whether a material difference exists, the PHA must

allow for any difference which may have existed with respect to the

initial Contract Rent. The initial difference is defined as a dollar

amount equal to the difference between the original comparable rent at

the time the unit went under HAP contract and the initial Contract

Rent. In many cases, however, PHAs never established the initial

difference. The Regular Moderate Rehabilitation rent formula is based

on a cost approach and therefore in most instances PHAs neglected to

perform a comparability analysis. Because of the nature of the Moderate

Rehabilitation program, the Department will assume that in most cases

an initial difference actually existed between comparable unassisted

rents and initial Contract Rents.

For those contracts where an initial difference was never

established, the Department has created a substitute method to allow

for the initial difference. Where an initial difference was never

established, the initial difference will be assumed to be ten percent

of the initial Contract Rent, unless an owner can document that the

initial difference was greater.

Providing for a substitute method that assumes the initial

difference is ten percent if it was never established is consistent

with HUD's procedures established for Section 8 New Construction and

Substantial Rehabilitation Properties where current contract rents are

above the published FMRs. In a direct issuance to HUD's Field Offices

(Notice H-95-12, issued March 7, 1995), HUD stated: ``In order to

provide a fair number to owners who may not be able to show proof of

the initial difference which existed in the initial Section 8 contract

rents, HUD will use 10% of the initial Section 8 contract rent (plus

the Financial Adjustment Factor, if applicable) where evidence of the

initial difference cannot be provided by the owner.'' (Page 4 of Notice

H-95-12). Accordingly, HUD's use of the 10 percent initial difference

in this rule is to maintain consistency and uniformity, to the extent

possible, in its Section 8 programs.

D. Special Adjustments

This proposed rule would clarify and expand the availability of

special rent adjustments. Special adjustments may not be approved

because of cost increases particular to operation of the individual

Owner or project, but only may be granted for ``general increases''

that affect operation of housing in the community. The proposed rule

would provide that these special adjustments may only be approved to

reflect ``substantial general'' increases in ``actual and necessary''

expenses of owning and maintaining the dwelling unit. The Owner does

not have a contractual or regulatory right to receive the special

adjustment. HUD ``may approve'' a special adjustment, and the PHA ``may

make'' a special adjustment. A special adjustment must be determined in

accordance with HUD procedures and be approved by HUD.

The proposed rule would implement section 142 of the Housing and

Community Development Act of 1992 (Pub.L. 102-550, approved October 28,

1992). Section 142 allows HUD to give a special adjustment, subject to

the availability of appropriations, to the extent HUD determines such

adjustments are necessary to reflect increases in the actual and

necessary expenses of owning and maintaining the units that have

resulted from the expiration of a real property tax exemption. In

addition, the proposed rule would include insurance in the categories

of cost increases that may result in a special adjustment, provided

that the insurance cost increases are actual and necessary expenses

which have resulted from substantial general increases in insurance

costs. Special adjustments are currently limited by the regulations

pertaining to real property taxes or special assessments, and increases

of utility rates or cost of utilities not covered by regulated rates.

On September 16, 1994 (59 FR 47772), HUD published a final rule

that implements section 542 of the Cranston-Gonzalez National

Affordable Housing Act of 1990 (Pub.L. 101-625, approved November 28,

1990). Consistent with section 542, the September 16, 1994 final rule

provides for PHAs to recommend, and HUD to approve, subject to the

availability of appropriations, a special adjustment, on a project by

project basis, to reflect substantial increases in operating,

maintenance and capital repair costs primarily due to the general

prevalence in the community of drug-related criminal activity. The

authority for this special adjustment is strictly subject to the

availability for appropriations for this purpose.

The September 16, 1994 final rule codified the section 542 special

rent adjustments provisions in Sec. 882.410(a)(2). This proposed rule

would move these provisions to Sec. 882.410(d), and would make some

organizational and minor clarifying language changes. However, the

substance of the special rent adjustment provisions as implemented in

Sec. 882.410(a)(2) in the September 16, 1994 final rule, remains the

same as in Sec. 882.410(d)(1),(2),(4) and (6) of this proposed rule.

[[Page 51660]]

III. Other Matters

Executive Order 12866

This proposed rule was reviewed by the Office of Management and

Budget (OMB) under Executive Order 12866 on Regulatory Planning and

Review, issued by the President on September 30, 1993. Any changes made

in this proposed rule as a result of that review are clearly identified

in the docket file, which is available for public inspection in the

office of the Department's Rules Docket Clerk, Room 10276, 451 Seventh

Street, SW, Washington, DC.

Environmental Impact

With respect to the rule's proposal to implement the comparability

studies provision of the HUD Reform Act, an environmental assessment is

unnecessary since statutorily required establishment and review of rent

schedules that do not constitute a development decision affecting the

physical condition of specific project areas or buildings sites is

categorically excluded from HUD's National Environmental Policy Act

(NEPA) procedures under 24 CFR 50.20(l). With respect to the proposed

rule's special rent adjustment provision, a Finding of No Significant

Impact with respect to the environment has been made in accordance with

HUD regulations at 24 CFR part 50, which implements section 102(2)(C)

of NEPA in connection with development of the September 16, 1994 final

rule that implements section 542 of the NAHA, and which provides for

special rent adjustments certain operating and maintenance costs

incurred as a result of a general prevalence of drug-related criminal

activity in the community. That Finding of No Significant Impact is

applicable to this proposed rule available for public inspection

between 7:30 a.m. and 5:30 p.m. weekdays in the Office of the Rules

Docket Clerk, Office of the General Counsel, Department of Housing and

Urban Development Room 10276, 451 Seventh Street, SW, Washington, DC

20410.

Executive Order 12612, Federalism

The General Counsel, as the Designated Official for HUD under

section 6(a) of Executive Order 12612, Federalism, has determined that

the policies contained in this proposed rule do not have federalism

implications and, thus, are not subject to review under the order. The

rule is limited to revising the regulations applicable to the Section 8

Moderate Rehabilitation Program on the matter of adjustment of Contract

Rents.

Executive Order 12606, the Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this proposed rule would

not have potential for significant impact on family formation,

maintenance, and general well-being, and, thus, is not subject to

review under the order. The rents paid by families in housing governed

under this rule are based on the income of the families, and not on the

Contract Rents affected by this rule. Therefore, the proposed rule is

not subject to review under that order.

Regulatory Flexibility Act

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this proposed rule before publication and

by approving it certifies that this proposed rule would not have a

significant economic impact on a substantial number of small entities.

Specifically, the rule would modify the procedures for adjusting

Contract Rents in the Section 8 Moderate Rehabilitation Program.

Paperwork Reduction Act Statement

The information collection requirements contained in this rule have

been submitted to the Office of Management and Budget for approval

under the Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520). The

following provisions of the rule have been determined by the Department

to contain collection of information requirements:

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Number

Number of responses Total Hours per

Submission requirements rrespondents per annual response Total hours

respondent responses

----------------------------------------------------------------------------------------------------------------

PHAs complete study........................... 130 1 130 20 2600

Notify owners of results where it is found

that a material difference exists............ 65 1 65 1 65

Owner appeal of results....................... 22 1 22 8 176

PHA process appeal............................ 22 1 22 4 88

Owner final appeal............................ 4 1 4 4 16

HUD review of final appeal and notify owner of

result....................................... 4 1 4 4 16

Owner submit request for special rent

adjustment due to expiration of real property

tax exemption................................ 100 1 100 10 1000

PHA process owner request for special rent

adjustment due to expiration of real property

tax exemption................................ 100 1 100 8 800

HUD review request for special rent adjustment

due to expiration of real property tax

exemption.................................... 75 1 75 8 600

Owner submit request for special rent

adjustment due to increases in insurance

costs........................................ 100 1 100 10 1000

PHA process owner request for special rent

adjustment due to increases in insurance

costs........................................ 100 1 100 8 800

HUD review request for special rent adjustment

due to increases in insurance costs.......... 75 1 75 8 600

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Total................................... 7,761

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List of Subjects in 24 CFR Part 882

Grant programs--housing and community development, Homeless, Lead

poisoning, Manufactured homes, Rent subsidies, Reporting and

recordkeeping requirements.

Accordingly, 24 CFR part 882, subpart D is proposed to be amended

as follows:

PART 882--SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM--EXISTING

HOUSING

1. The authority citation for part 882 continues to read as

follows:

[[Page 51661]]

Authority: 42 U.S.C. 1437a, 1437c, 1437f, and 3535(d). Subpart H

is also issued under 42 U.S.C. 11361 and 11401.

2. Section 882.410 is revised to read as follows:

Sec. 882.410 Rent adjustments.

(a) Annual adjustments. (1) Contract Rents will be adjusted

annually as provided in paragraph (a) of this section upon submittal to

the PHA by the Owner of a revised schedule of Contract Rents, provided

that the unit is in decent, safe, and sanitary condition and that the

Owner is otherwise in compliance with the terms of the Lease and

Contract. The Annual Adjustment Factors (AAFs) which are published

annually by HUD (see Schedule C, 24 CFR part 888) will be utilized.

(2) On or after each annual anniversary date of the Contract, the

Contract Rents may be adjusted in accordance with this paragraph and

other established HUD procedures. Contract Rents will only be adjusted

for housing assistance payments for the months commencing 60 days after

the PHA receives the Owner's revised schedule of Contract Rents.

Contract Rents will not be adjusted retroactively or cumulatively. The

annual adjustment with respect to any anniversary date must be

requested prior to the next annual anniversary date.

(3) The adjusted Contract Rents cannot exceed the amount

established by multiplying the applicable AAF by the base rents then

adding the monthly rehabilitation debt service.

(4) Rents to be adjusted by the AAF must then be examined in

accordance with paragraphs (b) and (c) of this section and may be

adjusted accordingly.

(b) Overall limitation. (1) Notwithstanding any other provisions

of this part, adjustments as provided in this section must not result

in material differences between the rents charged for assisted and

unassisted units of similar age, quality, and type in the same market

area, as determined by the PHA (and approved by HUD in the case of

adjustments under paragraph (d) of this section). A material difference

between the assisted and comparable unassisted rent is determined to

exist if the adjusted Contract rent is greater than the maximum

allowable Contract rent plus any difference which may have existed

initially. The maximum allowable base rent is a dollar amount equal to

105 percent of the comparable rent.

(2) In determining whether a material difference exists, the PHA

must allow for any difference which may have existed with respect to

the initial Contract Rent. If the PHA did not establish an initial

difference at the time the HAP contract was executed, ten percent of

the initial Contract Rent shall be used as a substitute, unless an

owner can document that the initial difference was greater.

(c) Comparability Studies. (1) A comparability study will be

conducted for the purpose of determining whether a material difference,

as described in paragraph (b) of this section, will result from

application of the AAF. The PHA will notify the Owner in writing of its

intention to conduct a comparability study.

(2) If the Contract rent, as adjusted by the AAF, plus the utility

allowance, is less than 110 percent of the current Existing Housing FMR

or exception rent (if granted for a geographical area in accordance

with Sec. 882.408(b)), the adjusted Contract Rent for the project shall

be approved by the PHA in accordance with HUD prescribed procedures and

the PHA shall not conduct a comparability study.

(3) If the Contract rent, adjusted by the AAF, plus the utility

allowance, is 110 percent or more of the current Existing Housing FMR

or if an exception rent limit (if granted for a geographical area in

accordance with Sec. 882.408(b)), the PHA will conduct a comparability

study to determine and approve an adjusted base rent that is not

materially different from rents charged for comparable unassisted

units.

(4)(i) In conducting a comparability study, the project's Contract

rents, as adjusted by the AAFs, will be compared to rents charged for

unassisted units of similar quality, type and age in the same market

area.

(ii) Comparability studies will be conducted by PHA staff. PHA

staff conducting the comparability studies will make adjustments

necessary to accommodate any difference between the comparables and the

assisted project that significantly affect the amount of rent charged

(including, without limitation, adjustments for utility charges).

(5) If it is determined by the comparability study that a material

difference would result (as provided in paragraph (b) of this section)

from application of the full AAF, a notice showing the results of the

study will be provided to the Owner within 30 business days of receipt

of the Owner's request for a rent increase. The Contract Rent will be

set at the maximum allowable Contract rent (as defined in paragraph (b)

of the section). However, the Contract Rent will never be reduced as a

result of a comparability study.

(6) Where the results of a comparability study show that a material

difference would not result from application of the full AAF, the base

rent will be adjusted by the full AAF to determine the new Contract

Rent.

(7)(i) Appeals of the decision to disapprove a full adjustment

under the AAF must be made to the appropriate PHA within 30 business

days from the date of the notice as required in paragraph (c)(5) of

this section. Sufficient documentation must be provided of any

objections to the decision.

(ii) The PHA will review the appeal within 30 business days from

receipt of the documentation.

(8) Final appeals of the PHA decision may be made to the

appropriate HUD Field Office.

(d) Special adjustments. (1) A special adjustment, to the extent

determined by HUD to reflect increases in the actual and necessary

expenses of owning and maintaining the unit which are not adequately

compensated for by annual adjustments under this part, and which have

resulted from substantial general increases in real property taxes,

assessments, utility rates, utilities not covered by regulated rates,

or increases in insurance costs, may be recommended by the PHA for

approval by HUD.

(2) Subject to the availability of appropriations for the purpose

specified in paragraph (d)(2) of this section, a special adjustment may

be recommended by the PHA for approval by HUD when HUD determines,

based upon a clear demonstration by the Owner, that a project is

located in a community where drug-related criminal activity is

generally prevalent, and not specific to a particular project, and the

project's operating, maintenance, and capital repair expenses have

substantially increased primarily as a result of the prevalence of such

drug-related activity.

(i) HUD may, on a project-by-project basis, provide adjustments to

the maximum monthly rents to a level no greater than 120 percent of the

current gross rents for each unit size under a Housing Assistance

Payments Contract to cover the costs of maintenance, security, capital

repairs and reserves required for the Owner to carry out a strategy

acceptable to HUD for addressing the problem of drug-related criminal

activity.

(ii) Where the strategy involves physical improvements, HUD will

perform an environmental review to the extent required under HUD's

environmental regulations at 24 CFR

[[Page 51662]]

part 50 prior to approving the special adjustment.

(3) Subject to the availability of appropriations, a special

adjustment also may be recommended by the PHA for approval by HUD when

and to the extent HUD determines such adjustments are necessary to

reflect increases in such actual and necessary expenses that have

resulted from expiration of an exemption from real property tax.

(4) The special rent adjustments described in paragraph (d) of this

section only will be approved if and to the extent the Owner clearly

demonstrates that these general increases have caused increases in the

Owner's operating costs which are not adequately compensated for by

annual adjustments.

(5) Special adjustments are a separate component of the Contract

Rent and are never added to the Base Rent for the purpose of

calculating annual rent adjustments.

(6) The Owner must submit financial information to the PHA which

clearly supports the increase. For Contracts of more than twenty units,

the Owner must submit audited financial information.

(e) Effective date of special adjustments. The effective date of

the adjusted Contract Rent will be the first day of the month following

the actual increase, or the first day of the month after the Owner's

written request for the special adjustment, whichever is later. Special

adjustments for security will not be made retroactively.

(f) Term of special adjustments. (1) The term of a special rent

adjustment will be coterminous with the period of the increased cost to

the Owner, subsequent to its effective date. HUD will approve the term

of the special adjustment and the special adjustment must be terminated

at the end of the specified term. The special adjustment must be

reviewed annually by the PHA to determine whether it is still

justifiable. The PHA may request and HUD may approve a decrease or an

increase in the term.

(2) Special adjustments are removed from the Contract Rent at the

end of the approved term. The removal of a special adjustment from the

Contract Rent at the end of the approved term is not and will not be

considered a reduction of Contract Rents.

(g) Rent reductions. Contract Rents will never be reduced as a

result of a comparability study, but may be reduced when the project

has been refinanced in such a manner that the periodic payment of the

Owner has been reduced. The Owner is required to notify the PHA of any

refinancing that occurs during the term of the HAP Contract. When the

property acquisition portion of a loan has been refinanced, procedures

prescribed by HUD will be utilized to recompute the base rents in

relation to AAFs. Such procedures shall not be applicable to projects

under subpart H of this part.

Editorial Note: This document was received at the Office of the

Federal Register on September 26, 1995.

Dated: December 1, 1994.

Joseph Shuldiner,

Assistant Secretary for Public and Indian Housing.

[FR Doc. 95-24368 Filed 9-29-95; 8:45 am]

BILLING CODE 4210-33-P