Rent Adjustments in the Mark-to-Market Program

CourtHousing And Urban Development Department
Citation85 FR 43165
Published date16 July 2020
Record Number2020-14436
Federal Register, Volume 85 Issue 137 (Thursday, July 16, 2020)
[Federal Register Volume 85, Number 137 (Thursday, July 16, 2020)]
                [Proposed Rules]
                [Pages 43165-43168]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-14436]
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                DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
                24 CFR Part 401
                [Docket No. FR 6122-P-01]
                RIN 2577-AJ48
                Rent Adjustments in the Mark-to-Market Program
                AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
                Commissioner, HUD.
                ACTION: Proposed rule.
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                SUMMARY: Under the Mark-to-Market program, HUD preserves the
                affordability of eligible multifamily housing projects by modifying
                above-market rents while restructuring project debt to an amount
                supportable by the modified rents. This proposed rule would revise the
                Mark-to-Market program regulations to clarify that all annual rent
                adjustments for projects subject to a restructuring plan are by
                application of an operating cost adjustment factor (OCAF) established
                by HUD. The current regulations contain a provision authorizing HUD to
                approve a request for a budget-based rent adjustment in lieu of an
                OCAF. However, this provision is both contrary to the governing
                statutory framework and inconsistent with Mark-to-Market renewal
                contracts, which allow only OCAF rent adjustments. The proposed rule
                would conform the regulations to the governing statutory provision, the
                terms of Mark-to-Market renewal contracts, and the programmatic
                practice of adjusting rents annually only by OCAF.
                DATES: Comment Due Date: September 14, 2020.
                ADDRESSES: Interested persons are invited to submit comments regarding
                this proposed rule. Copies of all comments submitted are available for
                inspection and downloading at www.regulations.gov. To receive
                consideration as public comments, comments must be submitted through
                one of two methods, specified below. All submissions must refer to the
                above docket number and title.
                 1. Electronic Submission of Comments. Interested persons may submit
                comments electronically through the Federal eRulemaking Portal at
                www.regulations.gov. HUD strongly encourages commenters to submit
                comments electronically. Electronic submission of comments allows the
                commenter maximum time to prepare and submit a comment, ensures timely
                receipt by HUD, and enables HUD to make them immediately available to
                the
                [[Page 43166]]
                public. Comments submitted electronically through the
                www.regulations.gov website can be viewed by other commenters and
                interested members of the public. Commenters should follow the
                instructions provided on that site to submit comments electronically.
                 2. Submission of Comments by Mail. Comments may be submitted by
                mail to the Regulations Division, Office of General Counsel, Department
                of Housing and Urban Development, 451 7th Street SW, Room 10276,
                Washington, DC 20410-0500.
                FOR FURTHER INFORMATION CONTACT: Thomas R. Davis, Director, Office of
                Recapitalization, Office of Multifamily Housing Programs, Department of
                Housing and Urban Development, 451 Seventh Street SW, Room 6106,
                Washington, DC 20410; telephone number 202-402-7549. Persons with
                hearing or speech impairments may access this number via TTY by calling
                the Federal Relay Service at 1-800-877-8339.
                SUPPLEMENTARY INFORMATION:
                I. History
                 The Multifamily Assisted Housing Reform and Affordability Act of
                1997 (Title V of Pub. L. 105-65, approved October 27, 1997 and codified
                at 42 U.S.C. 1437f note) (MAHRA) authorizes the Mark-to-Market program,
                which is designed to preserve low-income rental housing affordability
                while reducing the long-term costs of federal rental assistance. Under
                the program, multifamily housing projects with above-market rents that
                are subject to an expiring contract under section 8 of the United
                States Housing Act of 1937 (42 U.S.C. 1437f) (Section 8) undergo both a
                restructuring of the project's HUD-insured or HUD-held debt and an
                initial renewal of its Section 8 contract so that a new first loan is
                serviceable based on modified rents.
                 The renewal of the Section 8 contract is governed by section 515 of
                MAHRA. Under section 515(a), HUD is required to offer and an owner is
                required to accept an initial renewal of the project's Section 8
                contract if the renewal is in accordance with the terms and conditions
                specified in a mortgage restructuring and rental assistance sufficiency
                plan meeting the requirements of section 514 of MAHRA (Restructuring
                Plan). Under such a Restructuring Plan, the renewal rents are based on
                either comparable market rents, as required under section 514(g)(1) of
                MAHRA, or a budget, as permitted in limited circumstances under section
                514(g)(2). In either case, the rents are adjusted annually by an OCAF,
                as required under section 514(e)(2). At the conclusion of the debt-
                restructuring process, HUD issues an initial renewal contract (Mark-to-
                Market Renewal Contract) for a maximum 20-year term reflecting the
                renewal rents and requiring annual OCAF rent adjustments, and the owner
                executes a minimum 30-year use agreement, as required under section
                514(e)(6). As long as the use agreement remains in place, subsequent
                renewals are governed by section 515(b) of MAHRA.
                 HUD initially implemented MAHRA through an interim rule published
                on September 11, 1998, at 63 FR 48926 (Interim Rule), both for projects
                that are subject to a Restructuring Plan (24 CFR part 401) and those
                that are not (24 CFR part 402). Consistent with section 514(e)(2) of
                MAHRA, the Interim Rule required that all projects subject to a
                Restructuring Plan receive annual OCAF rent adjustments (63 FR 48948).
                It also implemented section 524 of MAHRA, as it existed then, which
                authorized HUD to renew expiring Section 8 contracts for projects that
                were not undergoing debt-restructuring but was silent on rent
                adjustments. The Interim Rule reflected an administrative determination
                that rents for contracts renewed under section 524 would be adjusted by
                an OCAF but could be ``redetermined using a budget-based rent
                adjustment from time-to-time at the discretion of HUD'' (63 FR 48954).
                 HUD issued the final rule implementing MAHRA on March 22, 2000, at
                65 FR 15485 (Final Rule). Approximately five months earlier, however,
                section 524 had undergone an extensive amendment (section 531(a) of
                Pub. L. 106-74, approved October 20, 1999) that expanded and refined
                the renewal terms for projects not subject to a Restructuring Plan. As
                amended, section 524 of MAHRA requires HUD to renew a project's
                expiring Section 8 contract at the request of the owner under one of
                various owner-selected options, provided that the project is eligible
                and the Secretary has determined that a Restructuring Plan is not
                necessary. The options in section 524(a) require that renewal rents not
                exceed market, while section 524(b)(1), which applies to a limited
                universe of projects identified in section 524(b)(2), prescribes a
                renewal rent formula unconstrained by market. Section 524(c)(1)
                requires annual OCAF rent adjustments but authorizes HUD to approve a
                budget-based rent adjustment in lieu of an OCAF. Section 524(c)(1) is
                explicitly limited, however, to contracts initially renewed under
                section 524(a), (b)(1), or (e)(2) of MAHRA. Relying on section
                524(c)(1), HUD included a provision in the Final Rule (Sec.
                401.412(b)) that had not appeared in the Interim Rule purporting to
                allow HUD to approve an owner's request for a budget-based rent
                adjustment in lieu of an OCAF for projects renewed under section 515(a)
                of MAHRA subject to a Restructuring Plan.
                 To implement section 524(c)(1) of MAHRA, which HUD then thought to
                have relevance for projects subject to a Restructuring Plan, the Final
                Rule states with respect to Sec. 401.412, ``We . . . added a new
                paragraph (b) explaining the availability of budget-based adjustments
                upon request of the owner, subject to the approval of the Secretary, as
                provided in Pub. L. 106-74'' (emphasis added). Although the amended
                section 524 has no application to projects that are subject to a
                Restructuring Plan, HUD at that time viewed section 524 as the
                subsequent renewal authority for projects subject to a Restructuring
                Plan and therefore believed that a discretionary budget-based rent
                adjustment would have been available during the term of any subsequent
                renewal under section 524(a), (b)(1), or (e)(2) of MAHRA. In this
                regard, the preamble to the Final Rule states, ``A Restructuring Plan
                will provide for adjustments using OCAF under this section, but this
                section will not prevent HUD from offering [subsequent] renewal with
                rent levels higher than those resulting from OCAF rent adjustments, if
                legally authorized'' (emphasis added) (65 FR 15461). The preamble to
                the Final Rule further states, ``We added language . . . under which
                HUD . . . must offer to renew section 8 contracts as provided in a
                Restructuring Plan, subject to . . . the renewal authority available at
                the time of each contract expiration. Section 524 of MAHRA (as amended
                by Pub. L. 106-74) will be the [subsequent] renewal authority''
                (emphasis added) (65 FR 15483).
                 After publication of the Final Rule, however, HUD determined that
                for the life of the minimum 30-year use agreement required under
                section 514(e)(6) of MAHRA, the subsequent renewal authority for
                projects subject to a Restructuring Plan is section 515(b) of MAHRA,
                not section 524, and that only after the use agreement expires and the
                owner requests and is granted a subsequent renewal contract under
                section 524(a), (b)(1), or (e)(2) of MAHRA would a discretionary
                budget-based rent adjustment be available in lieu of an OCAF under
                section 524(c)(1). This determination is reflected in Mark-to-Market
                Renewal Contracts, which were finalized in the year following
                [[Page 43167]]
                publication of the Final Rule and which provide for annual rent
                adjustments by an OCAF without any provision authorizing a budget-based
                rent adjustment in lieu of an OCAF. Moreover, Mark-to-Market Renewal
                Contracts explicitly state that no rent adjustments other than an OCAF
                are allowed. Consistent with these determinations, HUD's policy has
                been not to approve a request for a budget-based rent adjustment while
                a project is subject to a Restructuring Plan despite the apparent
                authority to do so under Sec. 401.412(b) of the Final Rule.
                 Like section 515(a) of MAHRA, which it implements, Sec. 401.554 of
                the Final Rule states that HUD will ``offer to renew or extend'' a
                Section 8 contract, as provided in a project's Restructuring Plan.
                Because the programmatic practice is to offer to renew rather than to
                extend, HUD is proposing to revise this language accordingly. In
                addition, HUD is proposing to remove a parenthetical phrase in Sec.
                401.554 suggesting that there may be more than one renewal authority
                for projects subject to a Restructuring Plan.
                II. Justification for Change
                 HUD is proposing this regulatory change to clarify the Mark-to-
                Market regulatory scheme by aligning the text of Sec. 401.412 with
                section 514(e)(2) of MAHRA, the terms of Mark-to-Market Renewal
                Contracts regarding rent adjustments, and the programmatic practice of
                adjusting rents annually only by an OCAF. HUD believes that removing
                paragraph (b) would eliminate the misperception that a budget-based
                rent adjustment is available for projects that are subject to a
                Restructuring Plan. In addition, HUD believes that removing language in
                Sec. 401.554 stating that HUD will offer to ``extend'' Section 8
                contracts, and other language that refers to multiple renewal
                authorities, would clarify these provisions.
                III. Summary of Proposed Rule
                 HUD is proposing to remove Sec. 401.412(b), which provides that
                HUD may approve a request for a budget-based rent adjustment for
                projects that are subject to a Restructuring Plan.
                 In addition, HUD is proposing to revise Sec. 401.554 to remove the
                statement that HUD will ``extend'' Section 8 contracts. In keeping with
                the explanation above, HUD is also proposing to remove a parenthetical
                reference in Sec. 401.554 to multiple renewal authorities for
                contracts subject to a Restructuring Plan.
                IV. Findings and Certifications
                Regulatory Flexibility Act
                 The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally
                requires an agency to conduct a regulatory flexibility analysis of any
                rule subject to notice and comment rulemaking requirements, unless the
                agency certifies that the rule will not have a significant economic
                impact on a substantial number of small entities. This proposed rule
                would codify existing statutory interpretations of the authorities
                granted for the Mark-to-Market program. It does not create compliance
                costs, nor does it alter the underlying operation of the Mark-to-Market
                program. Therefore, the undersigned certifies that this proposed rule
                would not have a significant economic impact on a substantial number of
                small entities.
                 Nevertheless, HUD is sensitive to the fact that the uniform
                application of requirements on entities of differing sizes may place a
                disproportionate burden on small entities. HUD, therefore, is
                soliciting alternatives for compliance from small entities as to how
                these small entities might comply in a way less burdensome to them.
                Paperwork Reduction Act
                 In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
                3501-3520), an agency may not conduct or sponsor, and a person is not
                required to respond to, a collection of information, unless the
                collection displays a currently valid Office of Management and Budget
                (OMB) control number. This proposed rule does not change any
                information collection requirements.
                Executive Order 12612, Federalism
                 Executive Order 13132 (entitled ``Federalism'') prohibits an agency
                from publishing any rule that has federalism implications if the rule
                either imposes substantial direct compliance costs on state and local
                governments and is not required by statute, or the rule preempts state
                law, unless the agency meets the consultation and funding requirements
                of section 6 of the executive order. This proposed rule would not have
                federalism implications and would not impose substantial direct
                compliance costs on state and local governments or preempt state law
                within the meaning of the Executive Order.
                Environmental Impact
                 This proposed rule governs statutorily required establishment and
                review of rent schedules and related administrative and fiscal
                requirements and procedures which do not constitute a development
                decision that affects the physical condition of specific project areas
                or building sites. Accordingly, under 24 CFR 50.19(c)(6), this proposed
                rule is categorically excluded from environmental review under the
                National Environmental Policy Act of 1969 (42 U.S.C. 4321).
                Unfunded Mandates Reform Act
                 Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
                4; approved March 22, 1995) (UMRA) establishes requirements for Federal
                agencies to assess the effects of their regulatory actions on state,
                local, and tribal governments, and on the private sector. This proposed
                rule does not impose any Federal mandates on any state, local, or
                tribal government, or on the private sector, within the meaning of the
                UMRA.
                List of Subjects for 24 CFR Part 401
                 Grant programs--housing and community development, Loan programs--
                housing and community development, Low and moderate income housing,
                Mortgage insurance, Mortgages, Rent subsidies, Reporting and
                recordkeeping requirements.
                 Accordingly, for the reasons described in the preamble, HUD
                proposes to amend 24 CFR part 401 as follows:
                PART 401--MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE
                RESTRUCTURING PROGRAM (MARK-TO-MARKET)
                0
                1. The authority for part 401 continues to read as follows:
                 Authority: 12 U.S.C. 1715z-1 and 1735f-19(b); 42 U.S.C.
                1437(c)(8), 1437f(t), 1437f note, and 3535(d).
                0
                2. Revise Sec. 401.412 to read as follows:
                Sec. 401.412 Adjustment of rents based on operating cost adjustment
                factor (OCAF).
                 (a) OCAF. The Restructuring Plan must provide for annual adjustment
                of the restructured rents for project-based assistance by an OCAF
                determined by HUD.
                 (b) Application of OCAF. HUD will apply the OCAF to the previous
                year's contract rent less the portion of that rent paid for debt
                service. This paragraph applies to renewals of contracts that receive
                restructured rents under either section 514(g)(1) or (2) of MAHRA.
                0
                3. Revise Sec. 401.554 to read as follows:
                Sec. 401.554 Contract renewal and administration.
                 HUD will offer to renew section 8 contracts as provided in each
                Restructuring Plan, subject to the availability of appropriations and
                subject to the renewal authority
                [[Page 43168]]
                available at the time of each contract expiration. The offer will be
                made by HUD directly or through a PAE that has contracted with HUD to
                be a contract administrator for such contracts. HUD will offer to any
                PAE that is qualified to be the section 8 contract administrator the
                opportunity to serve as the section 8 contract administrator for a
                project restructured under a Restructuring Plan developed by the PAE
                under the Mark-to-Market Program. Qualifications will be determined
                under both statutory requirements and requirements issued by the
                appropriate office within HUD, depending on the type of section 8
                assistance that is provided.
                Brian D. Montgomery,
                Deputy Secretary.
                [FR Doc. 2020-14436 Filed 7-15-20; 8:45 am]
                BILLING CODE P
                

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