Contract Renewals & Rental Adjustments

Contract Renewals & Rental Adjustments

Accurate and timely processing of contract renewal requests is of the utmost importance in order to avoid delays in subsidy payments. NHC works with property owners throughout the renewal process to ensure that their request is prepared timely and in accordance with HUD guidelines. The renewal request is due to NHC 120 days before the contract expires. To help you remember to prepare your submission, we will send a reminder letter two months prior to the due date. We encourage you to start preparing as soon as you receive NHC's reminder letter as this can be a time consuming process.

There are six renewal options from which to choose:

Tools and Rent Adjustment

Choosing from these options can be daunting, especially if you have not done it before.
Below are several tools to assist you with this process.

  1. Section 8 Renewal Policy (PDF): Official HUD guidance on Section 8 HAP Contract Renewals
  2. Option Information: Learn more about the 6 renewal options
  3. Forms: Find the forms you need to submit your request under Helpful Links/HUD Forms page.

Don't Forget

Thirteen (13) months before your contract expires, you must notify your residents of your intention to renew or not renew the contract. See sample Notices of Intent:

Rent Adjustments

Depending on which renewal option you choose, you may be eligible to submit a Rent Adjustment request. Also, if your property has a Utility Allowance, you will be required to perform a Utility Allowance Analysis with each request for a rent adjustment.

Option 1:
Request Renewal Under The Mark Up To Market Procedure

Option 1 is a good way to bring rents up to market, if you are eligible. Option 1 is divided into Option 1-A and Option 1-B.

Get started with the Option 1 Calculation Worksheet or read more about it...

The renewal contract will be the Mark-Up-To-Market renewal contract with a minimum of a five-year term.

Option 1-A

Rents may be renewed at the lesser of comparable market rents or 150% of the Fair Market Rents (FMRs).

Eligibility Requirements:

  • A Real Estate Assessment Center (REAC) physical inspection score of 60 or above with no unresolved Exigent Health and Safety (EHS) items.
  • Profit motivated or a limited distribution ownership.
  • Comparable Market Rents at or above 100% of the FMR potential.
  • The project does not have a low-and-moderate income use restriction that cannot be eliminated by unilateral action by the owner.

Option 1-B

To further preserve the affordable housing stock, HUD has the discretionary authority to mark rents up to market for projects that meet certain criteria but do not qualify under Option 1-A.

For owners who request participation in Option 1-B, and for owners of projects that request an increase in rents above the cap on comparable rents of 150% of FMR, HUD will consider these requests if the project meets at least one of the following three characteristics.

  1. Vulnerable Populations: The tenants of the property are a particularly vulnerable population, demonstrated by a high percentage of units rented to elderly families, disabled families, or large families.
  2. Vacancy Rates: The property is located in a low-vacancy market where there is a lack of affordable housing and where tenant-based vouchers would be difficult to use.
  3. Community Support: The property is a high priority for the local community as demonstrated by a contribution of state or local funds to the property.

Requests for Option 1-B are processed and approved by the Program Center after recommendation from NHC.

Option 2:
Request Renewal of Contracts with Current Rents At Or Below Comparable Market Rents

Option 2 is for owners who request a renewal of their Section 8 contract where the RCS indicates that the contract's current rents are at or below comparable market rents.

Eligibility

  • Current Rents are at or below market rents as determined by the RCS.
  • OR the contract's current rents exceed comparable market rents but the project is exempt from OAHP restructuring and the owner is willing to cut the rents to comparable market rents.

Submission Requirements

  1. Contract Renewal Request Form (HUD Form 9624 - Option 2)
  2. OCAF Worksheet (HUD Form 9265) or Budget-based Rent Adjustment Request: Any rent adjustment will be limited by the comparable rents from the current RCS.
  3. Rent Comparability Study (RCS): Since an RCS is good for five years, this will only be required every fifth year.

HUD Guidance

Chapter Four of the Section 8 Renewal Policy has complete guidance regarding Option 2.

Rent Adjustments with Multi-year Contracts

Annual rent adjustments can be either OCAF Rent Adjustments or Budget-Based, as determined by the owner. Every 5th year (from the contract effective date), an RCS is required to adjust the rents to comparables.

Option 3:
Request referral to HUD's Office of Affordable Housing Preservation (RECAP)

Option 3 is divided into Option 3-A (RECAP-LITE): Renewal of the contract without restructuring, with rents marked down to market; and Option 3-B (RECAP-FULL): A mortgage or rent restructuring and contract renewal with the rents marked down to market.

Eligibility Requirements:

  • FHA-insured loan
  • Current Rents are above market rents.

Submission Requirements

Option 3A

Option 3B

Regardless of your option selection, NHC will refer your contract to RECAP for restructuring if the contract rents exceed comparable market rents and if the contract is eligible for referral.

HUD Guidance
Chapter Five of the Section 8 Renewal Policy has complete guidance regarding Option 3.

Option 4: Request Renewal for Projects Exempted From Restructuring

Eligibility
Option 4 is for owners whose properties are considered exception properties. Specifically, the following projects are identified by the statute as "exception properties":

  1. Project(s) with primary financing or mortgage insurance that were provided by a unit of state or local government and not insured under the National Housing Act.
  2. Projects financed under section 202 of the Housing Act of 1959 or section 515 of the housing act of 1949 (includes 202/8, 515/8: does not include 202 and 811 Capitol Advance projects, which do not have section 8 contracts)
  3. Projects that have an expiring contract 1937 Act pursuant to section 441 or the Stewart B. McKinney Homeless Assistance Act (SRO Mod Rehab)
  4. Projects that do not qualify as projects pursuant to 512 of MAHRA. Such as:
    1. A project that is not subject to a HUD-held or insured mortgage
    2. A project that has FHA mortgage insurance or is HUD-held with rents at or below comparable market rate.

The main benefit is that you do not have to submit a Rent Comparability Study (RCS) at contract renewal, as you do with Options 1 and 2. However, unlike Options 1 and 2, under Option 4 the property is subject to the Lesser Of Test.

The Lesser Of test means that the owner submits both an OCAF Adjustment request and a Budget-Based Adjustment request.  NHC will process both adjustments and approve the lesser of the two.

Submission Requirements

HUD Guidance
Chapter Six of the Section 8 Renewal Policy has complete guidance regarding Option 4.

Rent Adjustments with Multi-year Contracts
Annual rent increases during the term of the contract can be either OCAF Rent Adjustments or Budget-Based, as determined by the owner. However, if you submit a budget-based adjustment, you must submit an RCS that demonstrates that your adjusted rents will not be above comparable rents, as determined by the RCS.

Option 5:
Request Renewal of Portfolio Reengineering Demonstration or Preservation Contract

Eligibility for Option 5 is limited to two types of properties:

  1. Preservation Projects
    Owners who entered into a long term use agreement with HUD as part of the Preservation Program must renew under Option 5. The rent adjustment method is determined by the Plan of Action that was approved by HUD as part of the Preservation process. These contracts can be renewed for up to the lesser of 20 years or the remaining term of the use agreement.
  2. Demonstration Projects:
    HUD is no longer doing initial renewals under the Portfolio Reengineering Demonstration Program.

Submission Requirements

HUD Guidance
Chapter Seven of the Section 8 Renewal Policy has complete guidance regarding Option 5.

Option 6:
Notification of Intention to Opt Out of the Section 8 Contract

NHC will make every effort to maintain the inventory of Affordable Housing within the States of Georgia and Illinois.  Owners selecting Option 6 will be made aware of all available options, including Mark-up-to-Market.

However, if the owner chooses to opt out and has satisfied all the relevant requirements, NHC will process the request in an expeditious manner.

The following requirements must be met before an owner may opt-out:

Submission Requirements

HUD Guidance
Chapters Eight and Eleven of the Section 8 Renewal Policy have complete guidance regarding Option 6.

Rental Adjustments

Rent Adjustment Types. Your HAP Contract will determine the rent adjustment method you should use. If your contract is expiring, please see our Contract Renewal Options above to determine your renewal option for the upcoming year.

Operating Cost Adjustment Factor (OCAF) Rent Adjustments

  • The OCAF (Operating Cost Adjustment Factor) is a factor that is established by HUD, and is applied to the existing contract rent (less the portion of the rent that is paid for debt service).
  • OCAF Values are determined by HUD annually and are published in the Federal Register. The OCAFs are usually published in February of each year. Properties with contracts expiring after February 11th are subject to the new OCAF values.
  • The Auto OCAF was created to streamline the rent increase process. The Auto OCAF will automate the process of an OCAF rent increase for Section 8 contracts in Amend Rent years. Owners/Agents will no longer need to calculate and supply the OCAF worksheet as part of the Amend Rents package.

Submission Requirements for OCAF Rent Increases:

  • OCAF Worksheet or Signed Auto OCAF letter (sent to Owner/Agent via email, 150 days before funding expiration)
  • Utility Allowance Analysis (if applicable)
  • Verification of Annual Project Debt Service (ex. monthly mortgage statement, Promissory note) Debt Service = Principal + Interest + MIP – IRP Subsidy (if applicable)

Options that allow an OCAF/Auto OCAF to be submitted:

  • Option 1 – During amend rents only years, eligible for auto OCAF (unless a new RCS is needed)
  • Option 2 – During contract renewals years & eligible for auto OCAF in amend rents only years (unless a new RCS is needed)
  • Option 3 – During amend rents only years, eligible for auto OCAF
  • Option 4 – During contract renewals (accompanied by a budget per the lesser of test) & eligible for auto OCAF in amend rents only years
  • Option 5 – During contract renewals (if applicable – see POA or Use Agreement)
  • Option 6 – During amend rents only years *(Option 5A, Demos with restructured loans only, Eligible for Auto OCAF for Life of Use Agreement)(Options 5B are not eligible for an auto-OCAF)

Budget Based Rent Increase (BBRI) Rent Adjustments

The budget based rent adjustment is a great way for properties to increase their rent levels to support property expenses. A budget-based rent increase (BBRI) request should be prepared in accordance with the requirements of HUD Handbook 4350.1, Chapter 7.

Submission Requirements for Budget Based Rent Increases:

  • A cover letter that:
  • summarizes the reasons why a rent increase is needed
  • provides the date the increase will be effective
  • describes the project’s physical condition and any improvements that have been budgeted for
  • Budget Worksheet – HUD-92547-ASchedule of Charges and Project Information (must be signed)
  • Statement & documentation explaining basis for any increases in expense line items if increase 5% or more and $500 or greater (comparing proposed budget to Current FY’s actuals and the previous years Audited figures)
  • Executed copy of Owner’s Certification Regarding Purchase Practices and Reasonableness of Expenses (Appendix 3)
  • A signed request for increase in Reserve Deposit – See Appendix 6 (if requested)
  • Notice to Tenants (if applicable) in accordance with 24 CFR 245.310 & Owner’s Certification As to Compliance with Tenant Comment Procedures
  • Utility Allowance Analysis (if applicable)

Options that allow a BBRI to be submitted:

  • Option 2 – During contract renewals & amend rents only years
  • Option 4 – During contract renewals (accompanied by an OCAF worksheet per the lesser of test) & amend rents only years (accompanied by a RCS)
  • Option 5 – During contract renewals & amend rents only years (if applicable – see POA or Use Agreement)

Annual Adjustment Factor (AAF) Rent Adjustments

  • AAFs (Annual Adjustment Factors) are developed by HUD on the basis of Consumer Price Index (CPI) data on changes in residential rent and utility costs, and data from Random Digit Dialing (RDD) rent-change surveys of the HUD regions.
  • HUD publishes the AAFs annually in the Federal Register
  • The AAFs are shown in two schedules:
    • Highest Cost Utility Included (Highest-cost utility is included in contract rent)
    • Highest Utility Excluded (Tenant pays for the highest-cost utility)
  • An AAF rent increase is effective for contracts commencing on the later of:
    • The annual contract anniversary date for which the adjustment is requested, or
    • The first contract month beginning at least two months after the owner has submitted all required materials to the CA (but no later than two months before the next annual contract anniversary date).

Submission Requirements for AAF Rent Increases:

  • AAF Forms —(See Notice 2002-10)
    • Appendix 1 if Pre-Adjustment gross rent exceeds the existing Fair Market Rent

Or

    • Appendix 2 if Pre-Adjustment gross rent does not exceed the existing Fair Market Rents (also for all LMSA & PD section 8 contract types)

Owner’s Certification Form – Appendix 3

  • Unit Turnover Report – Appendix 4
  • AAF RCS Adjustment Worksheet – Appendix 5 (if pre-Adjustment gross rent exceeds the existing Fair Market Rent)
  • Rent Comparability Study (RCS) – (if Applicable)
  • Utility Allowance Analysis (if Applicable)

Utility Allowance (UA) Adjustments

Update To Utility Allowance Regulations

HUD provides utility allowances to properties receiving subsidy assistance where all or some utilities are paid directly by the residents. 

Utility Allowances are required to be calculated using HUD's New Methodology as outlined in HUD Housing Notice 2015-04.  All properties are required to establish a baseline every 3 years as outlined in the Housing Notice.

Frequently Asked Questions 

 

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