Ways to increase Section 8 Contract Rents.
In June of 2017, HUD issued an updated Section 8 Renewal Policy Guide. Chapter Nine was completely reorganized and updated. Chapter 9 Appendix 9-1-2 includes line by line instructions and threshold limits for deductions. These thresholds hold the key to increases Section 8 contract Rents. A line by line breakdown is presented below.
John Doyle participation in a panel discussion at the NLHA Conference, Washington DC October 2018
- HUD has an increased participation in more of our RCS’s than ever before due to the 140% test.
- There is a more specific process developed by HUD for reviewers- this may have helped eliminate some reviewers that were not following the process but may have also introduced more detailed review…
- This process has introduced a new twist to how to resolve disagreements—can we still appeal?
- Owners need to advocate for themselves and pay attention to the review process.
Appraisal companies like the ones on the panel- Gill Group & Doyle Advisors (and The Signal Group too)- may play different roles- work for owners, work for HUD, act as a reviewer—these experts understand all sides of what the job is and how to make sure you are getting what you need.
Things an owner should be aware of when obtaining an RCS, that may affect its usefulness?
- Qualifications of appraiser,
- How long the report is acceptable without an update,
- Steps to update, etc.
Aside from just the rents themselves for a HAP contract, what other things can an RCS affect
How the rents don’t just affect the bottom line but how they can affect the overall value, the ability to sell properties with lower rents (but maybe lower cap rates), the effects concluded rents have on other affordable projects in the area, etc.
The issues or lack of clarity about how appeals should be handled
- Bad reports ordered by HUD overturned—Appeal? .
- Getting a solution without an appeal.
- What is not supposed to happen in a review (HUD reviewer wanting to have you pick different comps)—etc….
John Doyle participation in a panel discussion at the NLHA Conference, Washington DC October 201
- Hot Buttons” that HUD, vis-à-vis their consultant, wants the reviewers to focus on
- Consistent (not necessarily the same) adjustments across unit types, i.e., from grid to grid
- explaining which are the best comps and making sure the final rent reflects greatest weight on the best comparables
- Advise the owners how to do a quick evaluation so as to get a sense of the feasibility of the RCS and its acceptance.
- Macroeconomic Trends – The coastal communities have experienced rent increases far out-pacing inflation and OCAF. Middle America, starting 50 to 100 miles from the Atlantic and Pacific, have experienced nominal appreciation.
- Consequently, for secondary and tertiary markets rent studies will be coming in at levels that are only a few percent higher than 5 years ago and below the OCAF-trended rents from 5 years ago.
- Mitigation at a Microeconomic level
- Evaluate the facility’s amenities and Non-Shelter Services. Identify opportunities to ramp up so that the appraiser can honestly add $ to line items on the Rent Grid.
- The large scale, professionally managed companies know what is going to happen to Gross Revenue in Year 5 and proactively address anticipated downturns.
- The mid-size, OCAF-addicted, owner-managers are the target market for the presentation message.
- Policy Implications – I understand that most owner/agents see HUDs overall approach is to achieve rent decreases any way possible. Regardless of whether it is ad-hoc or a formal policy, it will be counter-productive when lower rents are applied to a recent FHA-insured financing or refinancing. HUD cannot have a concurrent goal to force properties into M2M restructuring within 5 years; yet that appears to be an unintended consequence.
- OCAF Overview
- OCAF rates are used to determine the revenue increase for Section-8 Properties
- OCAF rates vary by state. Since 2008 state OCAFs have ranged between 50% below the national average to nearly 100% above the national average.
- Budget Projects for a Section-8 property must take into account that OCAF rates will regress to the mean
- In other words, an OCAF history above the national average will trend below the national average in order to reach a long term average that is equivalent to the national average.
- Section-8 properties in low-OCAF states and in a strong local market will not achieve maximum rent revenue
- Mid-contract Rent Studies can be useful in achieving market-rate adjustments.