HUD Housing Programs: Tenants’ Rights (The Green Book): 12.2.4.3.1 Legal Standards and Strategies
The legal standards for required conversion and strategies for preventing such conversion are discussed on the next page.
The legal standards for required conversion and strategies for preventing such conversion are discussed on the next page.
Required conversion is a multi-step process involving the identification of units, development of a PHA conversion plan and its review and approval by HUD. This is followed by the actual implementation of the approved plan. The following discussion focuses on the regulatory standards.
Because conversions under Section 33 are statutorily required, few legal handles are available to challenge such activity. Fortunately, required conversions will probably be fairly rare, as relatively few developments will meet the regulatory criteria for “distress.”
The legal standards for voluntary conversion and strategies for preventing such conversion are discussed below.
The legal standards for voluntary conversion are similar to those for required conversion. It is a multi-step process involving the development of “assessments” followed by “conversion plans.” As with required conversion, this process is tied to the PHA’s annual plan.265
Compared to required conversions, voluntary conversions should be more vulnerable to challenge. Because they are not statutorily mandated, voluntary conversion activities, especially to the extent that they displace families and reduce affordable housing opportunities, can be challenged using essentially the same strategies for challenging demolition or disposition, including programmatic noncompliance and fair housing violations.309
Because of the normally long waiting list for public housing, the effective vacancy rates in well-managed projects should approach zero, reflecting only the very limited amount of time required to prepare a recently vacated unit for new occupants. In some projects, however, vacancy rates may be much higher. Most often this occurs because of poor management and maintenance policies, such as excessive turnover and inordinate delays in the process of preparing the units for new occupants.
The initial source of the PHA’s duty to maintain public housing projects at full occupancy is in the public housing legislation itself.
As with demolition or disposition of public housing, the problem of excessive vacancies is one that may be solved by political as well as legal methods and will require the organized effort of project tenants, of applicants denied admission, and of organizations concerned about the shortage of low-income housing. Using tenant and community participation rights in the PHA plan process can improve a PHA’s policies to promote higher occupancy rates.325
Because of the continuing and growing need to recapitalize the public housing stock, programs and policy proposals to replace units with other forms of subsidy will continue to arise at the federal and local level.336 Whatever their promise for addressing the physical conditions of the units, these replacement initiatives necessarily pose risks for tenants and communities, by possibly changing the rules governing affordability, long-term use restrictions, ownership and management, and a wide array of tenant and applicant protections.
Units can be lost from the Tenant-Based Section 8 Voucher program for a variety of reasons. Two factors that can result in loss of actual Vouchers to the community and possibly to currently assisted households are: (1) PHA underutilization of authorized Voucher units or budget authority that results in fewer units used in the community and could trigger HUD’s reallocation of the funds elsewhere; and (2) changes in Voucher funding formulas or annual appropriations.
A PHA that does not use its full Voucher allocation assists fewer families, and applicants must wait longer for housing assistance. In addition, a low PHA lease-up or “utilization rate” may result in less funding for a PHA in future years or prevent a PHA from obtaining additional Vouchers that occasionally become available, which again affects the number of applicants admitted and their waiting time. Finally, a low utilization rate may result in Voucher funding being removed from the jurisdiction and allocated elsewhere, despite unmet local needs.
Each PHA’s Voucher program depends on annual federal appropriations, as well as the formula used to distribute those funds.633 Since 2007, Congress has used a Voucher renewal funding formula that bases each PHA’s annual renewal funding on Voucher leasing (not to exceed the number of authorized Vouchers) and costs for the prior calendar year, adjusted for inflation.634 This policy has reduced funding uncertainty and generally increased utilization rates.
Most owners of properties with HUD-subsidized mortgages have the unilateral option to discontinue their participation in the program by prepaying the loan any time after 20 years from original mortgage endorsement.364 However, unilateral prepayment is available only where the property is not subject to an additional prepayment approval requirement under federal, state, or local law. The “Prepayment Eligibility” flowchart, Appendix 12C, at the end of this chapter, can help identify which laws apply to new prepayment requests.
During the first 20 years of most Section 221(d)(3) BMIR or Section 236 properties developed by for-profit or limited-dividend owners, and during the full mortgage term for some other HUD-subsidized properties (depending on other subsidies or ownership type), prepayment requires prior HUD approval.
Generally, most conversions to market-rate use are now subject to the owner’s choice. However, in many cases, the existing restrictions on some properties, and the procedural and substantive requirements of federal, state, and any local laws may provide legal claims to delay, inhibit or prevent conversion. Legal claims may be important to achieve some or all of the objectives of tenants; alternatively, the judicial process may not be well-suited to doing so.
Of increasing scope and concern is the conversion risk posed from the retirement of the mortgage through repayment of the entire principal loan amount over its scheduled term. Most HUD-subsidized loans were for a 40-year term, although some were for 30-year terms, often those that were state-financed rather than HUD-insured. When any loan is fully repaid according to its original amortization schedule, the mortgage and accompanying regulatory agreement are extinguished.
Expiring use restrictions will inevitably pose problems for tenants housed under any federal program that utilizes profit-motivated ownership, where market conditions encourage conversions.
An owner’s default on the loan and mortgage can threaten HUD-subsidized units by precipitating a foreclosure by HUD and a termination of the property’s use and affordability restrictions. Even where HUD acquires title at the foreclosure sale and seeks to re-sell the property, continued use of the property as affordable housing can be jeopardized.
This subsection provides only a brief overview of the foreclosure and disposition process. It should be used in conjunction with the Chart in Appendix 12F at the end of chapter, which provides a schematic overview of the process.