Project-Based Rental Assistance: HUD Should Update Its Policies  
and Procedures to Keep Pace with the Changing Housing Market	 
(11-APR-07, GAO-07-290).					 
                                                                 
In light of the pressing need for rental housing affordable to	 
low-income households and concerns that the Department of Housing
and Urban Development (HUD) may not be committed to maintaining  
its Section 8 project-based housing stock--a key source of such  
housing--Congress directed GAO to assess HUD's efforts to	 
preserve its project-based housing and recommend ways to improve 
these efforts. This report discusses (1) patterns in the volume  
and characteristics of HUD's Section 8 project-based properties; 
(2) tools and incentives that are available to encourage property
owners to stay in the program; and (3) the views of property	 
owners, managers, and industry representatives on HUD's 	 
preservation efforts. To address these issues, GAO analyzed HUD  
data, reviewed pertinent legislation and regulations, and	 
interviewed HUD officials and industry representatives. 	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-290 					        
    ACCNO:   A68112						        
  TITLE:     Project-Based Rental Assistance: HUD Should Update Its   
Policies and Procedures to Keep Pace with the Changing Housing	 
Market								 
     DATE:   04/11/2007 
  SUBJECT:   Disadvantaged persons				 
	     Federal aid for housing				 
	     Housing						 
	     Housing programs					 
	     Low income housing 				 
	     Program evaluation 				 
	     Program management 				 
	     Rent subsidies					 
	     Rental housing					 
	     Rental rates					 
	     HUD Section 8 Housing Assistance Program		 

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GAO-07-290

   

     * [1]Results in Brief
     * [2]Background
     * [3]While Most Owners Renewed Their Contracts, Patterns Were Ide

          * [4]Few Project-based Section 8 Owners Opted Out of the Program,
          * [5]Properties Leaving the Program Shared Similar Characteristic

               * [6]Partially Subsidized Properties Had a Higher Percentage
                 of O
               * [7]Family-occupied Properties Had a Higher Percentage of
                 Opt-ou
               * [8]For-profit Owners Had a Higher Percentage of Opt-outs
                 than O
               * [9]Properties in Poor Physical Condition Have a Higher
                 Percenta

          * [10]The Percentage of Opt-outs Varies Slightly by Region

     * [11]Mark-to-Market and Other Programs Encourage Owners to Keep T

          * [12]HUD Uses Mark-to-Market to Help Owners with Above-Market Ren
          * [13]Mark-up-to-Market Is Designed to Make the Section 8 Program
          * [14]HUD Also Offers Other Incentives to Preserve Certain Project
          * [15]Low-Income Housing Tax Credits, Tax-exempt Bonds, and Other

     * [16]HUD Policies and Procedures Have Caused Frustration for Some

          * [17]Many Project-Based Section 8 Owners Were Committed to Remain
          * [18]HUD's One-for-One Replacement Policy Can Result in Fewer Uni
          * [19]The OCAF Adjustment Process is Not Timely and Imposes a Fina
          * [20]Other Factors Affect Owners' Cash-Flows and Abilities to Und

               * [21]Late Subsidy Payments
               * [22]Administrative Costs Relative to Number of Section 8
                 Units
               * [23]The Limited English Proficiency Requirement
               * [24]Unclear HUD Policies and Procedures

     * [25]Conclusions
     * [26]Recommendations for Executive Action
     * [27]Agency Comments and Our Evaluation
     * [28]GAO Contact
     * [29]Staff Acknowledgments
     * [30]GAO's Mission
     * [31]Obtaining Copies of GAO Reports and Testimony

          * [32]Order by Mail or Phone

     * [33]To Report Fraud, Waste, and Abuse in Federal Programs
     * [34]Congressional Relations
     * [35]Public Affairs

Report to Congressional Committees

United States Government Accountability Office

GAO

April 2007

PROJECT-BASED RENTAL ASSISTANCE

HUD Should Update Its Policies and Procedures to Keep Pace with the
Changing Housing Market

GAO-07-290

Contents

Letter 1

Results in Brief 3
Background 7
While Most Owners Renewed Their Contracts, Patterns Were Identified Among
Properties Leaving the Program 13
Mark-to-Market and Other Programs Encourage Owners to Keep Their
Properties in the Section 8 Program 23
HUD Policies and Procedures Have Caused Frustration for Some Property
Owners and Could Cause Others to Leave the Project-Based Section 8 Program
27
Conclusions 38
Recommendations for Executive Action 39
Agency Comments and Our Evaluation 40
Appendix I Scope and Methodology 42
Appendix II Comments from the Department of Housing and Urban Development
45
Appendix III Number of Opt-outs by State in Identified Census Divisions 49
Appendix IV Number of Opt-outs by Metropolitan Area for the 3 Census
Divisions with the Highest Percentage of Opt-outs 51
Appendix V GAO Contact and Staff Acknowledgments 55

Tables

Table 1: Project-Based Section 8 Rental Assistance Programs with
Corresponding Financing Programs 8
Table 2: Number of Section 8 Contract Renewals and Terminations, Fiscal
Years 2001-2005 14

Figures

Figure 1: Section 8 Renewal and Opt-out Processes 12
Figure 2: Contract Opt-outs, Foreclosures/Enforcements, and Terminations
by Subprogram, Fiscal Years 2001-2005 15
Figure 3: Total Terminated Contracts Nationwide, Fiscal Years 2001-2005 16
Figure 4: Percentage of Section 8 Properties Renewed and Terminated by the
Percentage of Units Subsidized, Fiscal Years 2001-2005 18
Figure 5: Percentage of Section 8 Properties Renewed and Terminated by
Type of Occupant, Fiscal Years 2001-2005 19
Figure 6: Percentage of Section 8 Properties Renewed and Terminated by
Ownership Type, Fiscal Years 2001-2005 20
Figure 7: Percentage of Section 8 Properties Renewed and Terminated by
REAC Scores, Fiscal Years 2001-2005 21
Figure 8: Percentage of Section 8 Properties Renewed and Terminated by
Census Division, Fiscal Years 2001-2005 22
Figure 9: National and Selected State Opt-outs as a Percentage of All
Active Section 8 Units, Fiscal Years 2001-2005 23
Figure 10: Factors Contributing to HUD Fatigue 29

Abbreviations

FHA Federal Housing Administration
HUD Department of Housing and Urban Development
IRP Interest Reduction Payment
IRS Internal Revenue Service
LIHTC Low-Income Housing Tax Credit
MAHRA Multifamily Assisted Housing Reform and Affordability Act
NAHMA National Affordable Housing Management Association
OAHP Office of Affordable Housing Preservation
OCAF Operating Cost Adjustment Factors
PAE Participating Administrative Entities
PBCA Performance Based Contract Administrators
REAC Real Estate Assessment Center
REMS Real Estate Management System
TRACS Tenant Rental Assistance Certification System

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United States Government Accountability Office

Washington, DC 20548

April 11, 2007

The Honorable Patty Murray
Chairman
The Honorable Christopher Bond
Ranking Member
Subcommittee on Transportation, Housing and Urban Development, and
  Related Agencies
Committee on Appropriations
United States Senate

The Honorable John W. Olver
Chairman
The Honorable Joe Knollenberg
Ranking Member
Subcommittee on Transportation, Housing and Urban Development, and
  Related Agencies
Committee on Appropriations
House of Representatives

A continuing need for rental housing affordable to low-income households
has prompted congressional efforts to preserve the availability of rental
units subsidized by existing programs. Under the project-based Section 8
program, the Department of Housing and Urban Development (HUD) contracts
with property owners that receive rental subsidies for units rented to
low-income tenants.^1 These tenants pay a portion of the rent, generally
30 percent of their adjusted income, and the subsidies make up the rest.
In exchange for guaranteed rent payments from HUD, owners commit to
restricting their units to low-income tenants for 15 to 40 years under
contracts written or renewed since the program's inception in 1974. Since
then, HUD has provided rent subsidies to about 1.4 million households
through approximately 24,000 project-based Section 8 housing contracts.
Beginning in the late 1980s, however, these long-term contracts began to
expire and some owners opted not to renew them. In response, HUD has
sought ways to keep property owners in the program and preserve Section 8
housing.

^1The project-based section 8 program was authorized by the Housing and
Community Development Act of 1974, Pub. L. 93-383, and comprises several
subprograms that provide rental assistance.

Concerned that HUD was not committed to preserving the stock of existing
project-based Section 8 housing and may be encouraging owners to opt out
of the program or not encouraging them to stay, the Senate report
accompanying the fiscal year 2006 Transportation, Treasury, Housing and
Urban Development, the Judiciary, the District of Columbia, and
Independent Agencies Appropriations Act directed HUD to report on the
status of the agency's efforts to preserve project-based Section 8
housing, including an analysis of contract activity from 2001 to 2005. The
analysis was to include the number of units that had left the program and
the number that remained, by year, state, and locality. In August 2006,
HUD reported to Congress on the number of contract renewals and
terminations, types of assistance offered through the preservation
program, and steps taken to protect affected tenants.

In addition to requiring the HUD report, the Senate report directed us to
assess HUD's efforts to preserve affordable housing and provide
recommendations on how to improve these efforts. To this end, this report
examines (1) patterns in the volume, characteristics, and location of
HUD's project-based Section 8 properties--including those that left the
program--from 2001 through 2005; (2) available tools and incentives for
encouraging project-based Section 8 owners to keep their properties in the
program; and (3) views of property owners, managers, and industry
representatives on HUD's Section 8 housing preservation efforts and the
effect of those efforts on owners' decisions to opt out or keep properties
in the program.

To identify patterns in the volume and characteristics of properties from
2001 through 2005, we analyzed data extracts from HUD's Real Estate
Management System (REMS) from 2001 through 2005.^2 Our analysis looked at
the significance of a number of variables, such as occupancy type and
subsidy level, on owners' decisions to opt out of the Section 8 program.
We also reviewed a study that HUD commissioned from Econometrica, Inc.,
that was published in January 2006 and that compared multifamily
properties leaving the project-based Section 8 program with multifamily
properties remaining in it.^3 In addition, we monitored the progress of
HUD's analysis of terminated project-based Section 8 housing units and
those retained over a 5-year period and compared HUD's results with our
analysis. To determine what tools and incentives HUD used to preserve
project-based Section 8 properties, we reviewed and summarized legislation
and regulations pertaining to project-based Section 8 housing
preservation, documented HUD requirements, and conducted interviews with
HUD headquarters and selected field office staff, nonprofit organizations,
contractors, state and local government agencies, and lenders. To obtain
the views of owners, managers, and industry representatives on HUD's
preservation efforts, we conducted standardized interviews with both
for-profit and nonprofit owners of Section 8 properties, housing industry
organizations, state housing finance agencies, and other stakeholders in
five localities.^4 We judgmentally selected these locations based on the
following characteristics: (1) percentage of units that opted out of the
project-based Section 8 program from 2001 through 2005, (2) vacancy rates,
(3) geographic location, (4) percentage of households with worst-case
housing needs, and (5) HUD regional and field office program performance.
We conducted our work between October 2005 and April 2007 in Baltimore,
Chicago, Columbus, Houston, Los Angeles, New York, and Washington, D.C.,
in accordance with generally accepted government auditing standards.
Appendix I provides additional details on our scope and methodology.

^2REMS includes historical information on all properties in HUD's
multifamily portfolio, including data on project-based Section 8
properties and contracts. One Section 8 property may have multiple
contracts.

Results in Brief

Using data on the project-based Section 8 housing program from 2001
through 2005, we were able to identify patterns in the volume,
characteristics, and locations of contract renewals and terminations,
including contracts that property owners chose not to renew (opt-outs)
from 2001 through 2005.^5 Among other things:

           o The majority of project-based Section 8 housing owners chose to
           stay in the program. A total of 13,218 project-based Section 8
           contracts (931,570 units) were renewed from 2001 through 2005, or
           92 percent of the contracts during the review period and 95
           percent of the units covered by these contracts.^6 Conversely, 8
           percent or 1,155 contracts (covering 51,131 units) were
           terminated--6 percent because owners opted out of the program and
           2 percent because HUD foreclosed on the properties from 2001
           through 2005. Terminations decreased from 240 contracts (covering
           10,020 units) in 2001 to 160 contracts (covering 6,001 units) in
           2005.

^3Econometrica, Inc., Multifamily Properties: Opting In, Opting Out and
Remaining Affordable, HUD Contract no. GS-10F-0269K (Washington, D.C.:
January 2006).

^4Housing Finance Agencies are state-chartered authorities established to
help meet the affordable housing needs of residents of their states. They
serve as lenders and resource providers.

^5Terminations include opt outs, foreclosures, and enforcements.		   

^6These numbers reflect all contracts that were processed for renewal
during fiscal year 2001-2005 and were still active at the end of the
reporting period. They cover contracts that had been renewed prior to
fiscal year 2001, but were renewed again from 2001 through 2005, as well
as contracts that expired for the first time during this period.

           o Our discussions with property owners, managers, and industry
           representatives in five metropolitan areas indicated that market
           conditions were the primary factors in owners' decisions to leave
           or remain in the project-based Section 8 program and that HUD did
           not encourage owners to opt out of the program. In many cases,
           owners opted out to seek higher rents or to convert their units to
           condominiums in thriving housing markets such as Los Angeles and
           Manhattan.

           o We identified a number of key characteristics of properties that
           left the project-based Section 8 housing program. We found that
           more properties that had been rented to families left the program
           than properties that had been rented to individuals such as the
           elderly and persons with disabilities. Nonprofit owners, whose
           mission is to provide affordable housing, were more likely to
           renew their contracts, as were Section 202 owners whose mortgages
           require that they serve low-income elderly and persons with
           disabilities for up to 40 years.^7 We also found that a number of
           properties remained at risk of leaving the program because they
           had failed HUD's inspections. Finally, the number of contract
           renewals and opt-outs varied by geographic location. The largest
           percentage of opt-outs occurred in several midwestern
           states--Illinois, Indiana, Michigan, Ohio, and Wisconsin---the
           southern Atlantic (including Maryland, West Virginia, and the
           District of Columbia), and the Pacific coast (including Alaska and
           Hawaii). They were generally concentrated in large metropolitan
           areas.

           HUD offers a number of tools and incentives to property owners
           seeking additional funding to support their Section 8 properties.
           Owners that did use incentives primarily chose the Mark-to-Market
           program, under which Section 8 owners with above-market rents
           receive additional assistance from HUD in exchange for reducing
           rents, and the Mark-up-to-Market program, which adjust rents to
           prevailing market conditions while maintaining affordability for
           low-income households. These tools have been effective in
           preserving some Section 8 projects, but they apply to only a
           portion of the project-based Section 8 housing stock. Owners have
           used other HUD programs to maintain project-based Section 8
           housing to a lesser extent. For example, these programs allow
           those project-based Section 8 owners that previously had
           participated in the Section 236 program, which effectively reduces
           the mortgage interest to 1 percent, and the Section 202 program
           for the construction of elderly housing, to obtain additional
           financing for Section 8 property rehabilitation. Program officials
           and others whom we interviewed said that to supplement HUD's
           tools, nonprofits and housing industry representatives also
           encouraged Section 8 owners to obtain funds through programs
           outside of HUD, such as the Low-Income Housing Tax Credit (LIHTC)
           program and tax-exempt bonds. HUD officials told us that they did
           not consistently collect data on Section 8 properties that had
           used tax credits or tax-exempt bond financing.
		   
^7Prior to 1991, the Section 202 program provided direct loans at
below-market rates for up to 40 years to finance the construction of
rental housing for low-income elderly and persons with disabilities.

           Section 8 owners, property managers, and industry representatives
           we interviewed indicated that owners generally did not opt out of
           the project-based Section 8 program because of dissatisfaction
           with HUD's preservation efforts but because of market factors.
           Many owners said they remained in the program because they wanted
           the guaranteed income, and others--primarily nonprofit
           organizations--said they remained because their mission was to
           preserve affordable housing. However, some property owners,
           managers, and industry representatives expressed frustration with
           some of HUD's polices and practices, which they said could drive
           some property owners out of the program. Specifically, managers
           and owners expressed concern with HUD's lack of flexibility in
           policies such as the one-for-one replacement requirement, which
           prohibits reductions in the total number of Section 8 units in a
           property. While not mandated by statute, HUD adopted this policy
           in an attempt to maximize the number of units remaining in the
           program. Under this policy, HUD does not allow owners to reduce
           the number of Section 8 units when a contract is renewed. For
           example, HUD does not allow owners to reconfigure efficiency
           apartments into fewer one-bedroom units, even when market studies
           show great demand for such units. We identified a Chicago owner
           who chose to remove an 82-unit property from the program because
           HUD would not renew a contract with 3 fewer units. In addition,
           owners and managers indicated that some HUD practices and policies
           could cause financial distress. In particular, owners and managers
           expressed frustration with HUD's Operating Cost Adjustment Factors
           (OCAF), an annual inflation adjustment that reflects changes in
           operating expenses such as insurance and utilities. These owners
           and managers said that OCAF did not take into account cost
           differences across regions, was often out of date by the time it
           was applied, and did not respond to emergency situations. Owners
           and managers also identified some HUD policies and practices that
           they said lacked clarity, were not consistently applied, or were
           administratively burdensome and could weigh on owners' decisions
           to stay in or opt out of the program when their project-based
           contracts expired. For example, some property managers and owners
           told us that they needed full-time staff to manage project-based
           Section 8 administrative requirements, an expense that was
           particularly burdensome for owners with few section 8 units. HUD
           officials told us that they were currently reviewing the
           one-for-one replacement policy for elderly housing and the OCAF
           adjustment process to take into account emergency situations and
           rapid increases in utilities, insurance, and property taxes in
           some areas.

           To help ensure that affordable housing is provided to those
           persons in need and to keep pace with the changing housing market,
           we are recommending that HUD (1) expedite its reconsideration of
           the one-for-one replacement requirement for project-based Section
           8 housing and broaden its consideration to all project-based
           Section 8 housing properties on a case-by-case basis; and (2)
           address concerns about the need for more timely and
           better-targeted OCAF reimbursements. We are also recommending that
           HUD determine whether any of the other issues raised by owners,
           such as unclear and burdensome policies and procedures and
           inconsistent application of policies, are contributing to owners'
           decisions to opt out of the Section 8 program and that the agency
           take steps to address these issues as appropriate.

           We received comments on a draft of this report from HUD's
           Assistant Secretary for Housing---Federal Housing Commissioner
           (appendix II). The Commissioner generally agreed with the report
           findings, which were consistent with the findings of HUD's report
           to Congress. He also noted that it confirmed that HUD was using a
           variety of tools to encourage continued participation in the
           project-based Section 8 program. Further, he said that the agency
           was already taking steps that begin to address two of our
           recommendations: (1) modify the one-for-one replacement policy to
           allow some reduction or reconfiguration of existing units when
           appropriate, and (2) evaluating the OCAF adjustment process and
           plan to complete and announce the results by the end of fiscal
           year 2007. Finally, he said that HUD officials were aware of
           concerns raised by property owners that we cited and that the
           agency was always willing to consider recommendations that could
           reduce administrative costs and encourage owners to stay in the
           program.
		   
		   Background

           The Housing and Community Development Act of 1974, a major
           overhaul of housing laws, created the tenant-based and
           project-based Section 8 rental assistance programs for low-income
           households. The tenant-based program (now called Housing Choice
           Vouchers) provides rental assistance to eligible households to
           rent houses or apartments in the private market from landlords who
           are willing to accept the vouchers. Under the project-based rental
           assistance program, HUD enters into contracts with property owners
           to provide rental assistance for a fixed period of time.

           The project-based Section 8 program has multiple subprograms,
           including Section 8 New Construction and Substantial
           Rehabilitation, Loan Management Set-Asides, Preservation, and
           Property Disposition.^8 Rental assistance under these
           project-based Section 8 subprograms has been generally used in
           conjunction with other public funding. For example, a Section 8
           New Construction/Substantial Rehabilitation property could have
           been financed by a Federal Housing Administration (FHA) insured
           loan, a Section 202 direct loan, a U.S. Department of Agriculture
           Section 515 direct loan, or state housing finance agency bonds.
           Some of these programs provided financing for the construction or
           rehabilitation of affordable rental housing prior to the 1974 Act.
           (See table 1).
		   
^8In 1978, a moderate rehabilitation portion of the Section 8 program was
added but has not been funded since 1989. The authorization for the new
construction and substantial rehabilitation components of the Housing and
Community Development Act of 1974 were repealed in 1983.

Table 1: Project-Based Section 8 Rental Assistance Programs with
Corresponding Financing Programs

Rental Assistance Program  Description                                     
Section 8 New Construction Provides rent subsidies in new or substantially 
and Substantial            rehabilitated projects. Subsidy initially       
Rehabilitation             covered the difference between tenants' payment 
                              and fair market rent, as determined by HUD.     
                              Subsidy contracts were for 20 to 40 years. Tax  
                              incentives and financing arrangements also      
                              reduced owners' effective mortgage interest     
                              rates and project rents. No new contracts have  
                              been issued since the 1990s, and only existing  
                              contracts have been renewed.                    

Section 8 Loan Management  HUD contracts with owners of HUD-insured        
Set-Aside                  multifamily or HUD-held housing projects        
                              experiencing financial problems. The program    
                              seeks to minimize defaults on HUD-insured       
                              multifamily rental projects by ensuring a       
                              reliable income stream. Families receive a      
                              rental subsidy equal to the difference between  
                              their share of the rent and the rent charged by 
                              the owners, which was not to exceed applicable  
                              fair market rents.                              

Section 8 Property         HUD forecloses on subsidized properties with    
Disposition                HUD-held multifamily mortgages for properties   
                              with project-based Section 8 or sells HUD-owned 
                              multifamily properties with project-based       
                              Section 8 assistance.                           

Section 8 Preservation     This program assists multifamily properties by  
                              providing project-based Section 8 subsidies to  
                              a property in order to preserve its low-income  
                              status. There are no new contracts for this     
                              program.                                        

Financing Program                                                          
FHA Insurance              The FHA Multi-Family Mortgage Insurance program 
                              enhances credit for rental housing developments 
                              through the provision of federal loan           
                              guarantees. These guarantees provide a          
                              financing option in addition to those available 
                              in the private conventional market. FHA         
                              provides mortgage insurance for multifamily     
                              housing, supporting the construction of new     
                              apartment projects, and the refinancing of      
                              older ones.                                     

Section 202 Elderly and    Provides direct loans at below-market rates for 
Disabled Housing Direct    up to 40 years to finance the construction of   
Loan Program               rental housing for low-income elderly and       
                              disabled households. Projects built between1974 
                              and 1991 also receive project-based Section 8   
                              rent subsidies. The program is no longer        
                              active, although projects developed under it    
                              continue to operate. In 1990, the program was   
                              restructured to provide capital advances for    
                              the development of elderly housing under        
                              Section 202, and a Section 811 capital advance  
                              program was implemented to develop housing for  
                              persons with disabilities. Both 202 and 811     
                              projects receive operating assistance through   
                              Project Rental Assistance Contracts.            

Section 515                USDA's Rural Housing Service Section 515        
                              program began in the early 1960s. At that time, 
                              loans were generally made for 40 years, but     
                              borrowers were encouraged to refinance their    
                              properties in the private market and to prepay  
                              their loans. The program provides direct loans  
                              to developers at a 1 percent interest rate.     
                              Supplementary rental assistance is provided to  
                              approximately half of the units through USDA,   
                              while some units also receive rental assistance 
                              through the Section 8 programs. After 1989,     
                              loans were precluded from prepayments, and      
                              loans that were made before that date were      
                              restricted.                                     

Housing Finance            Projects financed by state Housing Finance      
Development Authority      Agencies (HFAs) through mortgage revenue or     
                              multifamily housing bonds.                      

Source: GAO.

Project-based Section 8 assistance may be provided only for tenants with
incomes no greater than 80 percent of an area's median income. Tenants
generally pay rent equal to 30 percent of adjusted household income. As
part of the Section 8 contract, property owners and managers are
responsible for ensuring that households meet program eligibility
requirements and calculating households' payments. HUD pays rent subsidies
directly to the property owners but does not pay them a separate
administrative fee. The owners' include their administrative costs in
their HUD-approved rents.

Project-based Section 8 properties are subject to physical and management
reviews. Most Section 8 contracts also require the submission of annual
financial reports from property owners. These reviews and reports are to
ensure management accountability and the physical condition of public and
assisted housing. HUD's Real Estate Assessment Center (REAC) conducts
physical inspections of all HUD multifamily properties every 1 to 3 years,
depending on the property's previous physical inspection score.
Project-based Section 8 properties are subject to annual management and
occupancy reviews to verify compliance with the terms of the project-based
Section 8 contracts, regulatory and management agreements, and management
plans.

In the mid- to late-1990s, Congress and HUD made several important changes
to the duration of housing assistance contracts, contract rents, and
management of on-going contracts.

           o In the mid-1990s because of budgetary constraints HUD shortened
           the terms of subsequent renewals after the initial 15- to 40-year
           terms began expiring. HUD generally reduced the contract renewal
           terms to 1 or 5 years, with the funding renewed annually subject
           to appropriations.

           o In 1997, Congress passed the Multifamily Assisted Housing Reform
           and Affordability Act (MAHRA) to ensure that the rents HUD
           subsidized remained comparable with market rents. Over the course
           of the initial contracts with owners, contract rents in some cases
           had begun to substantially exceed local market rents as market
           conditions changed. MAHRA generally requires an assessment of each
           property when it nears the end of its original contract term to
           determine whether the contract rents are comparable to current
           market rents and whether the property has sufficient cash flow to
           meet its debt and daily and long-term operating expenses. However,
           certain projects are exempt from the market comparability
           requirement (e.g., projects financed by state agency bonds). If
           the contract rents are higher than market rents, HUD can decrease
           the contract rents to market rents upon renewal. Conversely, if
           the expiring contract rents are below market rates, HUD may
           increase the contract rents to market rates upon renewal.

           o In 1999, because of staffing constraints (primarily in HUD's
           field offices) and the workload involved in renewing the
           increasing numbers of rental assistance contracts reaching the end
           of their initial terms, HUD began an initiative to contract out
           the oversight and administration of most of its project-based
           contracts. The entities that HUD hired--typically public housing
           authorities or state housing finance agencies--are responsible for
           conducting on-site management reviews of assisted properties;
           adjusting contract rents; reviewing, processing, and paying
           monthly vouchers submitted by owners; renewing contracts with
           property owners; and responding to health and safety issues at the
           properties. These performance-based contract administrators (PBCA)
           now administer the majority of project-based Section 8 contracts.

           In the late 1980s, initial Section 8 contracts began expiring; by
           2003, all of the original 20-year contracts had expired.
           Forty-year contracts will expire between 2014 and 2023. Section 8
           owners are offered six options upon contract expiration. According
           to the HUD Section 8 Renewal Guide, Section 8 owners may^9

           o renew without any modifications, with rents capped at HUD's
           market levels;
           o renew with rents that are elevated to market rents through the
           Mark-up-to-Market program;
           o renew with rents that are reduced to market rents through the
           Mark-to-Market program;
           o renew as a Section 8 "exception project;"^10 
           o renew as a Section 8 preservation or portfolio reengineering
           demonstration projects;^11 and
           o opt out of the Section 8 contract.

^9The Section 8 Renewal Guide provides comprehensive guidance for renewing
expiring project-based Section 8 contracts.

^10In general, Section 8 exception projects are those projects with
project-based Section 8 rental assistance, but without FHA mortgage
insurance. Owners of exception projects may maintain above-market rents if
justified on a cost basis.

^11Preservation projects are those projects maintained as affordable
housing under the Emergency Low Income Housing Preservation Act of 1987
(ELIPHRA) and the Low Income Housing Preservation and Resident Home
Ownership Act of 1990 (LIHPRA). The Portfolio Reengineering Demonstration
program was the predecessor to the Mark-to-Market program.

           When their contract expires, project-based Section 8 owners may
           decide not to renew their Section 8 contracts and convert their
           units from affordable housing to market rents. Once owners remove
           their properties from HUD programs, Section 8 households receive
           enhanced vouchers as long as they remain in their units.^12

           Owners are required to give both tenants and HUD notice of their
           intention to renew or opt out 1 year before the Section 8
           contract's expiration (see fig. 1). An owner who intends to opt
           out must also provide HUD with a 120-day notification. An owner
           who intends to renew is required to submit to HUD or the PBCA a
           request for contract renewal and a rent comparability study (when
           required) at least 120 days before the contract expires. Local HUD
           offices review the study to determine if the property's current
           rents are at, above, or below market rates. If rents are at or
           below market rates, HUD field office staff will make any necessary
           adjustments and execute a new Section 8 contract. If rents are
           above market, HUD staff renews the contract (at above-market
           rents) for up to 1 year and forward the owner's submission to the
           HUD Office of Affordable Housing Preservation (OAHP) for a
           Mark-to-Market restructuring. OAHP assigns properties to
           participating administrative entities (PAE) to carry out
           restructurings under the Mark-to-Market program on behalf of
           HUD.^13 The owner then signs a renewal contract with the contract
           administrator.

^12To protect Section 8 households from rent increases that may result
when owners opt out of their contracts or prepay their subsidized
mortgages, HUD provides a special type of tenant protection voucher known
as an enhanced voucher. Rents are set at market comparable levels, instead
of the regular voucher payment standard. A tenant with an enhanced voucher
is entitled to remain in his unit as long as the property remains a rental
property, provided the rent is reasonable.

^13The PAE is responsible for structuring Mark-to-Market transactions,
under contract with HUD. PAEs may be public or private entities or joint
ventures.

Figure 1: Section 8 Renewal and Opt-out Processes

Note: Exception projects are not subject to market comparability rent
study and are not referred to OAHP.

In a January 2004 report, we found that state and local agencies offer
incentives to preserve affordable housing, including project-based Section
8 housing. Some of these agencies perceived that the information on
opt-outs was not readily available. In this report, we recommended that
HUD make this information more widely available and useful.^14

14See GAO, Multifamily Housing: More Accessible Data Could Help Efforts to
Preserve Housing for Low Income Tenants, [36]GAO-04-20 , (Washington,
D.C.: Jan. 23, 2004).

States and localities may use funds provided by other federal programs to
subsidize housing for low-income tenants. The HOME program, authorized by
the Cranston-Gonzalez National Affordable Housing Act, is the primary
block grant program that state and local governments use to develop
affordable housing. Under the Low-Income Housing Tax Credit (LIHTC)
Program, authorized by the Tax Reform Act of 1986, state housing finance
agencies provide federal tax incentives to private investors to develop
housing affordable to low-income tenants. Some states and localities have
established housing trust funds and other financial mechanisms that have
helped organizations acquire HUD properties and maintain their
affordability to low-income tenants when owners want to sell properties
and exit the program.

Federal housing programs serve many different types of households and
provide units that are affordable at different income levels. For example,
under the LIHTC program, either 20 percent of units must be affordable to
households with incomes of less than 50 percent of area median household
income, or 40 percent of units must be affordable to households earning
incomes less than 60 percent of the area median income. HUD pays
assistance for project-based Section 8 units on behalf of tenants with
incomes no greater than 80 percent of area median income. Further, the
states and localities may use other tools and incentives, such as offering
property tax relief, to encourage owners to keep serving low-income
tenants.

While Most Owners Renewed Their Contracts, Patterns Were Identified Among
Properties Leaving the Program

We found a number of patterns in the volume, characteristics, and
locations of HUD's project-based Section 8 housing contract renewals and
terminations, from 2001 through 2005. First, from 2001 through 2005, 92
percent of project-based Section 8 housing assistance contracts and 95
percent of assisted units that were eligible for renewal were renewed. We
also found that the percentages of opt-outs, foreclosures, and
enforcements varied by project-based Section 8 subprogram. Relatively few
owners opted out of the Section 8 program, and of those we interviewed,
most reported that they did so to seek higher rents in the private rental
market or to convert their units into condominiums. Second, we found that
opt-outs shared other characteristics, such as property size and physical
condition. Finally, opt-outs were more prevalent in some regions and
localities.

Few Project-based Section 8 Owners Opted Out of the Program, and Opt-Outs Varied
by Subprogram

From 2001 through 2005, 14,373 of the 24,000 project-based contracts and
982,701 of the 1.4 million units were determined to be eligible for
renewal or termination. Of these, 92 percent of the eligible contracts and
95 percent of the eligible units remained in the program (table 2).

Table 2: Number of Section 8 Contract Renewals and Terminations, Fiscal
Years 2001-2005

                     Contracts             Units
Action      Number Percent    Number     Percent
Renewal             13,218     92    931,570  95 
Termination          1,155      8     51,131   5 
Total               14,373    100    982,701 100 

Source: HUD.

Note: The contracts included in the analysis are those that had either
renewal or termination activity during fiscal years 2001 through 2005.
These do not represent all Section 8 contracts.

The percentage of opt-outs while small overall, varied by subprogram. As
shown in figure 2, only 1 percent of project-based Section 8 contracts
whose owners financed the properties through the Section 202 program opted
out from 2001 through 2005. This percentage is generally low largely
because Section 202 property owners are nonprofit entities established for
the singular purpose of providing housing for the elderly or persons with
disabilities, and because the statute requires low income use at least
through the original term of the loan. As a result, it is in the owners'
interest to renew their project-based Section 8 contracts.^15 Similarly,
Section 8 contracts that also carry a U.S. Department of Agriculture
Section 515 mortgage had a much lower percentage of opt-outs (3 percent),
in part due to mortgage prepayment restrictions. Conversely, contracts
listed under Property Disposition, which are troubled properties, had the
highest percentage of opt-outs, foreclosures, and enforcements. In total,
of the 8 percent of contract terminations, 6 percent were due to opt-outs
and 2 percent were due to contract foreclosures and enforcements.

^15The American Homeownership and Economic Opportunity Act of 2000 (Pub.
L. 106-569; 12 U.S.C.1701q note) provides the authority for HUD to allow
higher than market Section 8 rents in connection with the refinancing of
the underlying Section 202 mortgage. According to HUD officials, this act
has improved the program's operations, including better meeting the
long-term needs of the elderly and people with disabilities served.

Figure 2: Contract Opt-outs, Foreclosures/Enforcements, and Terminations
by Subprogram, Fiscal Years 2001-2005

Note: Percentage of opt-outs and foreclosures/enforcements may not exactly
equal percentage of terminations due to rounding.

As shown in figure 3, the total number of project-based Section 8 contract
opt-outs nationwide declined from 240 in 2001 to 120 in 2003, but
increased slightly in 2004 to 125 and increased further in 2005 to 160.
Conversely, the number of foreclosures and enforcements has continued to
decline slightly over the period.

Figure 3: Total Terminated Contracts Nationwide, Fiscal Years 2001-2005

Properties Leaving the Program Shared Similar Characteristics

The properties that owners withdrew from the program shared similar
characteristics. Specifically, owners with properties that were generally
not fully subsidized by the program, were family occupied, were for
profit, or were in poor physical condition had a higher percentage of
opt-outs. Conversely, we did not find substantial differences in the
percentage of opt-outs based on property size, meaning owners with fewer
units were as likely to opt out as owners with more units.

  Partially Subsidized Properties Had a Higher Percentage of Opt-Outs

Properties that were only partially supported by the Section 8 program
comprised 4,492, or 33 percent, of the total 13,847 Section 8 properties
that renewed or terminated their contracts from 2001 through 2005.^16 As
shown in figure 4, about 13 percent of those properties with a less than
50 percent Section 8 subsidy level that were eligible to opt out during
the 5-year period from 2001 through 2005 did so, compared with about 4
percent of the properties that were fully supported by the Section 8
program. Owners with properties with subsidy levels between 50 and 97
percent were as likely to remain in the program as those that were fully
supported. These results were consistent with the views of owners about
their desire to continue receiving guaranteed payments that Section 8
provides. About 2 percent of all partially and nearly fully subsidized
properties were terminated through foreclosures or enforcements actions.

^16Although HUD's analysis deals strictly with contracts, the remainder of
this report section focuses on the 13,847 properties covered by the 14,373
contracts analyzed in the previous section because, from a policy
perspective, property counts serve as a better indication of the supply of
available housing for low-income tenants because a single property can
have multiple contracts.

Figure 4: Percentage of Section 8 Properties Renewed and Terminated by the
Percentage of Units Subsidized, Fiscal Years 2001-2005

Note: Percentage may not add up to 100 percent due to rounding. There were
7 properties with no data on subsidy level; of these properties, 29
percent were opt-outs and 71 percent were foreclosures/enforcements.

We consider properties with 98-100 percent Section 8 to be fully
supported, since some properties have an unsupported unit for use by the
property manager.

  Family-occupied Properties Had a Higher Percentage of Opt-outs Than Others

A higher percentage of properties identified as renting to families left
the project-based Section 8 program than properties rented to the elderly
and persons with disabilities. As shown in figure 5, 9 percent of
family-occupied properties opted out of the program from 2001 through 2005
compared to about 2 percent for properties identified as renting to the
elderly and persons with disabilities. The lower opt-out percentage for
properties renting to the elderly and persons with disabilities can be
attributed largely to the fact that many were financed through Section
202. As stated earlier, Section 202 owners find it is in their interests
to continue to serve the very-low income elderly and persons with
disabilities. Moreover, properties for the elderly and persons with
disabilities are generally owned by non-profit entities and have use
restrictions which require their low-income use through the terms of the
properties' original loan. Our analysis also found that family-occupied
properties also experienced a slightly higher percentage of
foreclosures/enforcements than properties for the elderly and persons with
disabilities.

Figure 5: Percentage of Section 8 Properties Renewed and Terminated by
Type of Occupant, Fiscal Years 2001-2005

Note: Percentage may not add up to 100 percent due to rounding. There were
323 properties with no data on occupancy type; of these properties, 7
percent were opt-outs and 3 percent were foreclosures/enforcements. Eleven
properties did not fall into any of the listed categories.

  For-profit Owners Had a Higher Percentage of Opt-outs than Others

For-profit and limited-dividend property owners had a higher percentage of
opt-outs than other types of property owners. Limited-dividend ownerships
are formed under federal or state laws or regulations and can have
restrictions involving rents, charges, capital structure, rate of return,
or methods of operations. As shown in figure 6, collectively these two
types of property owners represented 57 percent of all project-based
Section 8 properties and had the highest percentage of opt-outs, at 8 and
6 percent, respectively. Conversely, nonprofit owners had the lowest
percentage of opt-outs at 2 percent. The percentage of foreclosures and
enforcement actions for nonprofits was also slightly lower than for all
other types of ownerships.

Figure 6: Percentage of Section 8 Properties Renewed and Terminated by
Ownership Type, Fiscal Years 2001-2005

Note: Percentage may not add up to 100 percent due to rounding. There were
1,345 properties with no data on ownership type; of these properties, 10
percent were opt-outs and 5 percent were foreclosures/enforcements.

  Properties in Poor Physical Condition Have a Higher Percentage of Opt-outs

When properties repeatedly fail physical inspections, HUD officials told
us that they take action to protect the tenants by issuing vouchers and
terminating the Section 8 contract. The officials noted that in many cases
these owners wish to be relieved of HUD oversight and may believe they can
do so by failing to meet HUD requirements. HUD reviews each such case and
may take punitive enforcement action against the owner. These owners are
more likely to opt out. Physical REAC inspection scores reflect as-is
condition with negative adjustments for certain health and safety issues.
Figure 7 shows that 94 percent of the properties received passing scores,
with 50 percent of the properties receiving superior scores of over 89 and
44 percent receiving satisfactory scores (60-89).^17 Also, as shown in
figure 7, the percentage of opt-outs for properties with substandard or
severe scores was substantially higher than the percentages of opt-outs
for properties with satisfactory or superior scores.

Figure 7: Percentage of Section 8 Properties Renewed and Terminated by
REAC Scores, Fiscal Years 2001-2005

Note: Percentage may not add up to 100 percent due to rounding. There were
206 properties with no information on REAC physical inspection score; of
these properties, 16 percent were opt-outs and 20 percent were
foreclosures/enforcements.

^17HUD considers REAC physical inspection scores of 60 and above to be
passing.

The Percentage of Opt-outs Varies Slightly by Region

Our analysis of HUD data shows that the percentage of opt-outs varies
slightly by region. Certain parts of the country had more opt-outs than
other regions (fig. 8). Several southern states and New England
experienced the smallest percentage of opt-outs. Appendix III and IV
contain analyses of the number of opt-outs by state and the 3 regions with
the highest number of opt-outs, by metropolitan areas.

Figure 8: Percentage of Section 8 Properties Renewed and Terminated by
Census Division, Fiscal Years 2001-2005

Figure 9 shows the national average for opt-outs and states we visited
that experienced a higher percentage of opt-outs compared with the
national average. Consistent with the HUD commissioned study by
Econometrica, Inc., property owners and others we interviewed reported
that the location of the property and the changes in the valuation of the
neighborhood greatly influenced the owner's decision to remain or leave
the Section 8 program. For example, properties located in neighborhoods
with higher median incomes, higher median rent levels, and lower poverty
and vacancy rates had higher opt-outs as a percentage of all active
Section 8 units. Nationwide, over 50 percent of the opt-outs were in
metropolitan areas with a million or more residents.

Figure 9: National and Selected State Opt-outs as a Percentage of All
Active Section 8 Units, Fiscal Years 2001-2005

Mark-to-Market and Other Programs Encourage Owners to Keep Their Properties in
the Section 8 Program

HUD offers a number of tools and incentives to property owners seeking
additional funding to support their Section 8 properties. HUD reports that
when owners do choose to use the HUD incentives offered, they most often
select the Mark-to-Market and the Mark-up-to-Market programs. To a lesser
extent, some Section 8 owners are also eligible to participate in the
Section 236 decoupling program and the Section 202 refinancing program to
obtain additional funding for rehabilitation. However, because these
programs are available to only a portion of project-based Section 8 owners
and funding for rehabilitation is limited, project-based Section 8 owners
also use funds from programs outside of HUD for property rehabilitation.
HUD officials, owners, and industry representatives have told us that
Section 8 owners often opt to use non-HUD programs such as LIHTC and
tax-exempt bonds, which the IRS administers mostly through state housing
finance agencies. Both LIHTC and tax exempt bonds may be combined with HUD
incentives to maintain housing at rents affordable to low-income
households, but limited data is available to show how often owners make
this choice.

HUD Uses Mark-to-Market to Help Owners with Above-Market Rents Remain in the
Section 8 Program

The Mark-to-Market Program, which may consist of a full or "lite"
restructuring, often provides an incentive for owners with rents above the
market rate to remain in the Section 8 program. Owners that have a
contract with the project-based Section 8 program and mortgages that are
insured by FHA or held by HUD must participate in the program if their
rents exceed the prevailing market level (as determined by HUD).^18
Through a full Mark-to-Market restructuring, the owner is able to finance
rehabilitation needs, cover projected operating expenses, and, in some
cases, enhance the property's reserve fund to address future capital
improvement needs. In exchange for choosing a full Mark-to-Market
restructuring, owners virtually always receive a new project-based Section
8 contract with HUD and execute a Use Agreement to maintain the property
as affordable housing for at least 30 years.

Owners of FHA-insured properties with above-market rents may request to
participate in Mark-to-Market lite. This option involves only rent
restructuring rather than a full mortgage restructuring and is typically
used when owners can reasonably cover all of their expenses at the reduced
rents and still maintain an affordable mortgage payment. In addition to
lower rents, these owners generally renew their contracts for 5 years and
remain eligible to participate in a Mark-to-Market full restructuring at a
later date. According to HUD, Mark-to-Market lite is generally used for
properties in better financial and physical condition and rents that are
only slightly higher than market rents. Between 2001 and 2005, owners who
renewed their contracts using HUD incentives chose this option less often
than the full restructurings.

The Mark-to-Market program was scheduled to expire in October 2006.
However, the Revised Continuing Appropriations Resolution of 2007 extended
the program for an additional 5 years (through September 2011).^19 In
addition, the House and Senate introduced the Mark-to-Market Extension Act
of 2007 in January 2007.^20 If enacted, the act would (1) expand the
existing Mark-to-Market authorities to provide for higher rents for
eligible properties damaged by disasters, (2) expand the program's
authority to set rents above existing rent level limits, (3) increase to 5
years the period during which HUD may provide for not-for-profit debt
relief, and (4) allow a limited number of projects with rents below market
to be eligible for a Mark-to-Market restructuring.

^18There are a few exceptions to this rule, such as HUD-insured mortgages
financed by state or local agencies where a restructuring plan conflicts
with laws or regulations governing such financing.

^19Pub. L. 110-5.

^20H.R. 647 and S. 131.

Mark-up-to-Market Is Designed to Make the Section 8 Program More Attractive by
Ensuring That Owners Receive Market Rents

Owners with below-market rents may participate in the Mark-up-to-Market
program, which permits them to raise rents to either market rates or 150
percent of the HUD-determined fair market rent, whichever is less. The
program provides additional rental revenue for property operations and
renovation and increased distributions to owners of limited-dividend
projects. Typically, Mark-up-to-Market transactions occur in rental
markets with escalating rents that have exceeded HUD's established rent
levels for area properties. The program's goal is to encourage owners to
renew their contracts and remain in the Section 8 program by removing the
economic incentive to opt out.

HUD also has a Mark-up-to-Budget Program, which is a variation of the
Mark-up-to-Market program and has been used as an incentive for nonprofit
owners to preserve Section 8 properties with below-market rents. The
nonprofit owners must justify higher rents based on their operating budget
and repair costs. Under this program, HUD permits a Section 8 budget-based
rent increase for nonprofit properties to perform capital improvements
that will maintain the long-term financial and physical viability of the
property when current rents are not sufficient. According to HUD,
Mark-Up-to-Budget may be used by a nonprofit to either facilitate a
purchase transaction or finance needed repairs.

HUD Also Offers Other Incentives to Preserve Certain Project-Based Section 8
Affordable Housing

HUD has offered a number of other incentives to preserve affordable
housing, such as the Section 236 decoupling, Section 202 refinance, and
HOME programs, but only certain properties in the project-based Section 8
portfolio are eligible to take advantage of these incentives. Under
Section 236 of the National Housing Act, HUD provides a monthly Interest
Reduction Payment (IRP) subsidy to reduce the mortgage interest rate paid
by property owners effectively to 1 percent. The Section 236 decoupling
program allows leveraging of the IRP to benefit the owner and the property
and to provide funds for rehabilitation. For example, we visited a
nonprofit's 72-unit Section 8 property in Baltimore that according to the
property manager had not undergone a major renovation in more than 30
years. Because the property had a Section 236 mortgage and project-based
Section 8, the owner will be eligible to participate in the Section 236
Decoupling program. Through the 236 Decoupling program, the owner was able
to receive additional funds to make necessary repairs to the property and
to begin construction of a new community center.

HUD also administers a Section 202 refinancing program that allows owners
to refinance their direct HUD loans while maintaining their Section 8 rent
levels. According to HUD's August 2006 Report to Congress, the Section 202
refinancing program was used sparingly from 2001 through 2005, but
activity in the program increased significantly during fiscal year 2006.
In exchange for the refinancing, owners must agree to maintain affordable
occupancy restrictions, comply with HUD requirements, and undertake
appropriate rehabilitation of the property.

HOME is the largest federal block grant to state and local governments and
is designed exclusively to create affordable housing for low-income
households. Each year the program allocates approximately $2 billion among
the states and hundreds of localities nationwide. While HUD does not
maintain data on the number of project-based Section 8 properties that use
HOME funding, HUD officials have indicated that HOME funds have been used
as an incentive to keep project-based Section 8 owners in the program.

Low-Income Housing Tax Credits, Tax-exempt Bonds, and Other Tools May Also Help
Preserve Project-based Section 8 Housing

HUD officials, property managers, and industry groups told us that
project-based Section 8 owners also combine HUD preservation tools and
incentives with non-HUD preservation tools such as the LIHTC and
tax-exempt bonds to provide additional funds for rehabilitation.^21 LIHTC
and tax-exempt bonds can be used by themselves or with HUD incentives such
as Mark-to-Market to provide the Section 8 owner with funding for
substantial rehabilitation and repairs while keeping the property
affordable for low-income tenants. By combining incentives, the owner
would have enough resources for capital improvements while at the same
time ensuring that the property remained affordable through use-agreements
for at least 30 years. However, because LIHTC and tax-exempt bonds are
administered by state and local housing and finance agencies, HUD does not
consistently collect data on the number of Section 8 properties using
these incentives.

^21LIHTC is an indirect federal subsidy used to finance the development of
affordable rental housing for low-income households. LIHTC is an IRS
program based on Section 42 of the Internal Revenue Code and was enacted
by Congress in 1986 to provide the private market with an incentive to
invest in affordable rental housing.

According to HUD officials, industry groups, and owners, project-based
Section 8 owners often use LIHTC to provide additional funding for
rehabilitation. To be eligible for consideration under the LIHTC, a
proposed property must:

           o be a residential rental property;

           o commit to one of two possible low-income occupancy threshold
           requirements;

           o restrict rents, including utility charges, in low-income units;
           and

           o operate under the rent and income restrictions for 30 years or
           longer in accordance with written agreements with the agency
           issuing the tax credits.^22

           State and local housing finance agencies also sell tax-exempt
           housing bonds (commonly known as Mortgage Revenue Bonds and
           Multifamily Housing Bonds) and use the proceeds for several
           purposes. These include financing low-interest mortgages for low-
           and moderate-income homebuyers and acquiring, constructing, and
           rehabilitating multifamily housing for low-income renters,
           including Section 8 properties.

           HUD Policies and Procedures Have Caused Frustration for Some
		   Property Owners and Could Cause Others to Leave the Project-Based
		   Section 8 Program

           While most owners renewed their contracts, some told us that they
           had concerns with certain HUD policies and practices. Some
           described multiple frustrations that led to what they and industry
           representatives called "HUD fatigue." They said that frustrations
           with HUD could result in owners opting out of their contracts even
           when doing so might not be in their economic interest. Among the
           frustrations they discussed were HUD's one-for-one replacement
           policy for Section 8 units; policies and procedures that could
           lead to economic distress, especially Operating Cost Adjustment
           Factors (OCAF) payments; and a lack of clarity and consistency on
           HUD's part in applying policies. We found that the one-for-one
           replacement policy, in particular, resulted in a loss of some
           properties and higher vacancy rates that could potentially lead to
           foreclosure. Industry representatives whom we interviewed agreed
           that HUD could improve its policies and procedures for
           project-based Section 8 housing, and both industry representatives
           and owners offered suggestions for steps HUD could take to improve
           preservation efforts.
		   
^22LIHTC recipients must commit to one of two possible low-income
threshold requirements. Owners must commit to renting at least 20 percent
of the units to households with incomes at or below 50 percent of the
[47]HUD-established area median income or commit to renting at least 40
percent of units to households at or below 60 percent of the
HUD-established area median income.

           Many Project-Based Section 8 Owners Were Committed to Remaining
		   in the Program

           In the locations we visited, we spoke to owners and managers who
           either renewed their project-based Section 8 contract or decided
           to opt out of the program. Of those owners and managers who
           decided to remain in the program, many told us that their primary
           motivation was the guaranteed rental income that the Section 8
           subsidy provided. Some of the managers in depressed rental markets
           in the locations we visited told us that they would be unable to
           fill units or would have high vacancy rates if they were to opt
           out of the Section 8 program. As we have seen, nonprofit owners
           rarely decided to opt out of the Section 8 program and told us
           that they stayed in the program because their mission was to
           provide affordable housing.

           Generally, Section 8 owners and property managers in the locations
           we visited said that HUD did not encourage them to opt out of the
           Section 8 program. Rather, most stated that HUD tried to keep them
           in the program by using various tools and offering incentives,
           such as the Mark-to-Market and Mark-up-to-Market programs. HUD
           officials also stated that although their goal was to preserve as
           many project-based Section 8 housing units as they could, the
           final decision on whether to renew or opt out was made by the
           owner and in most cases was driven by market factors that were
           beyond HUD's control.
		   
		   HUD's One-for-One Replacement Policy Can Result in Fewer Units
		   and More Opt-outs

           Some owners who left the program said that their decision was
           based on economic or market factors and not on dissatisfaction
           with HUD. Nonetheless, many of the owners (both those that
           remained in and those that had left the Section 8 program),
           managers, and industry representatives with whom we spoke cited
           areas in which the Section 8 program could be improved. Owners and
           managers expressed concerns regarding specific HUD policies and
           practices that could result in opt-outs, foreclosures, or cause
           financial distress or that lacked clarity and consistent
           application. Figure 10 illustrates project-based Section 8 owners'
           frustrations with HUD that have caused opt-outs in the past or
           could possibly increase the number of future opt-outs. As shown in
           the graphic, although the majority of the opt-outs occur for
           economic or market factors, growing owner frustration could upset
           the balance causing more owners to consider opting out even when
           economic conditions could be overcome or mitigated.

           Figure 10: Factors Contributing to HUD Fatigue

           Some owners, managers, and industry representatives told us that
           some HUD practices have not always kept pace with changes in
           market conditions. For example, some owners told us that HUD
           required a one-for-one replacement policy for Section 8 units when
           owners renewed their contracts. That is, HUD generally does not
           allow owners to reduce the number of project-based Section 8 units
           or to reconfigure the units to better meet market demand, even
           when the alternative could result in owners opting out and
           removing all of their units from the program.

           HUD officials told us that although there was no statutory
           requirement for one-for-one replacement of project-based Section 8
           units, the unwritten policy had been to require replacement of
           units in all cases. HUD officials said that they based this policy
           on the public housing requirement set by the Housing and Community
           Development Act of 1987. However, Congress waived the one-for-one
           replacement requirement for public housing units from 1995 through
           1998, and the Quality Housing and Work Responsibility Act of 1998
           permanently eliminated it for public housing. HUD officials said
           that their rationale for maintaining their policy was that many of
           the properties had long waiting lists and that any reductions in
           the number of available units was counter to a demonstrated need
           for affordable housing.

           Some owners, managers, and industry representatives pointed to the
           one-for-one replacement requirement for all units as an example of
           one of their frustrations with HUD policies. Some owners told us
           that HUD would not allow them to reduce the number of Section 8
           units in a property or reconfigure the units to better meet market
           demand, even when some types of units had high vacancy rates and
           other types had long waiting lists. The requirement was
           particularly troublesome for owners of units containing efficiency
           apartments, which in some areas were not in high demand. These
           owners wanted to replace the efficiency apartments with fewer
           one-bedroom units, which were in demand. For example, one
           nonprofit that primarily serves the elderly told us that even
           though the HUD field office approved a transaction converting
           efficiencies into fewer one-bedroom units for one of their
           properties, HUD headquarters reversed that decision based on its
           one-for-one replacement policy. Also, a member of the National
           Affordable Housing Management Association (NAHMA), an association
           that represents property management agents, told us that the
           owners of an Iowa property rented to elderly tenants had
           difficulties filling efficiency units. NAHMA officials said that
           one of the owner's major obstacles in converting to one-bedroom
           units was getting HUD's approval to waive the one-for-one
           replacement policy. This lack of flexibility on the part of HUD in
           insisting upon one-for-one replacement, rather than--for
           example--evaluating each case on its own merits, could hinder the
           preservation of certain project-based Section 8 units.

           In at least one case, a property owner left the project-based
           Section 8 program because the owner could not convert some units
           into market-rate housing. The owners of a property in Chicago
           wanted to split their Section 8 contract and convert 3 of the 82
           units to condominiums, preserving the rest as Section 8. According
           to the owners, splitting the contract made sense because the three
           units were in a building that was separate from the remaining 79
           units. HUD's Chicago Field Office told the owners that they could
           not split the Section 8 contract because of the one-for-one
           replacement policy. As a result, the owners opted out, and all 82
           units left the Section 8 program.

           Other industry groups, including NAHMA, the National Leased
           Housing Association, and the law firm of Nixon Peabody, which
           represents owners and managers, also agreed on the need for HUD to
           adapt to changing market conditions in reconfiguring Section 8
           units. These representatives told us that some of their
           transactions involving project-based Section 8 units were being
           held up by issues relating to reducing the number of unmarketable
           efficiencies or reconfiguring other Section 8 units. HUD
           headquarters officials told us that they were aware of the problem
           and that they were rethinking their policy, particularly as it
           applied to units for elderly tenants, but were concerned about
           setting precedent for owners to request unit reductions even when
           the market factors were not an issue. HUD officials told us that
           they had initially planned to focus on providing flexibility to
           elderly developments affected by the one-for-one replacement
           policy. But the officials added that they had seen the need to
           assess the impact that the one-for-one replacement policy was
           having on family properties as well. Nevertheless, not allowing
           owners to reconfigure the number of units in their Section 8
           contract in certain cases could result in some owners deciding to
           opt out of the Section 8 contract altogether.
		   	   
           The OCAF Adjustment Process is Not Timely and Imposes a Financial
		   Burden on Some Owners

           Some of the owners, managers, and industry representatives told us
           that the OCAF inflation adjustments that owners are entitled to
           receive every year are not timely, equitable, or responsive to
           price hikes or emergency situations. OCAF adjustments are
           calculated by HUD annually using nine expense categories,
           including utilities, property taxes, and insurance that are
           aggregated at the state level.^23 Section 524 of MAHRA gives HUD
           broad discretion in setting OCAF adjustments, with one exception:
           that application of an OCAF adjustment will not result in a
           negative rent adjustment.
		   
           Owners, managers, and industry representatives were concerned that
           the OCAF adjustments were not made on a timely basis. According to
           a number of industry groups, the adjustments are often obsolete by
           the time they are adopted. HUD officials confirmed that there was
           a lag of about 15 to 18 months from the time that HUD collected
           the data to the time that the adjustments became effective. One
           industry representative told us that HUD was unable to revise the
           adjustments to respond to any cost hikes during the lag time
           period.

           Some of the owners and the industry representatives also told us
           that they were concerned with the unequal distribution of OCAF
           adjustments within states. Some owners and industry
           representatives pointed out that the formula HUD used did not take
           into account differences in markets within states for commodities
           such as electricity and insurance. They said that in some markets,
           the cost of utilities and insurance often escalated monthly, while
           in other areas this cost was relatively stable. For example, a
           property manager in New York City told us that it did not seem
           equitable to have the same OCAF adjustment for New York City,
           where costs were extremely high and likely to fluctuate
           precipitously, as for upstate New York, where costs were much
           lower.

^23The nine expense categories that HUD takes into account when
determining the OCAF adjustments are wages, employee benefits, property
taxes, insurance, supplies and equipment, fuel oil, electricity, natural
gas, and water and sewer.		   

           Some of the owners, managers, and industry representatives that we
           talked to also said that OCAF adjustments were not able to respond
           to price hikes or emergency situations in many parts of the
           country. For example, a member of NAHMA that managed elderly
           developments in Iowa told us that the OCAF adjustments during the
           last 4 years had been too small given the rapid escalation of
           natural gas rates in that region of the country. As a consequence,
           the management company had to use capital reserves to address
           operating cash deficits, putting it at risk of being unable to
           cover unexpected capital repairs. Another NAHMA member that
           managed a 120-unit project-based Section 8 property for the
           elderly in Minnesota said that heating costs had increased 22
           percent in 2006 over the previous year but that the OCAF
           adjustment for 2006 was only 2.8 percent. NAHMA officials said
           that rising utility costs had become an enormous challenge for
           many Section 8 owners. In particular, NAHMA officials noted that
           HUD needed a more timely mechanism to address emergency operating
           cost increases--for example, after natural disasters. Officials
           from Stewards of Affordable Housing, a group representing some of
           the largest nonprofits that own and manage project-based Section 8
           properties, also stated that OCAF adjustments did not keep up with
           inflation. For instance, a 2006 survey of members of the Florida
           Association of Homes for the Aging and the Southeastern Affordable
           Housing Management Association reported that none of the
           respondents had had an insurance premium increase of less than 50
           percent between 2005 and 2006. Further, the survey found that, on
           average, premiums had doubled in one year, and one respondent
           reported a tenfold increase in its insurance premium.

           HUD officials, including the Deputy Assistant Secretary for
           Multifamily Housing, said that they were aware of the lag in OCAF
           adjustments, the equity concerns, and the difficulties in
           responding to price hikes and emergency situations. However, they
           said that HUD was taking steps to address these issues. In the
           short term, HUD officials said that they were allowing owners to
           tap into their capital reserve accounts to cover unforeseen
           operating cost increases. However, this practice works only as
           long as reserves are available or future OCAF adjustments are
           guaranteed. In the long run, HUD officials plan to evaluate ways
           to change the OCAF adjustment factors and make them responsive to
           market factors. To deal with the issue of market differences
           within a state, HUD is currently considering a proposal to make
           adjustments to OCAF using data from metropolitan areas instead of
           states. HUD officials said that they were also considering an
           industry group's proposal to address owners' concerns about price
           hikes and emergency situations.^24 The proposal would authorize
           owners to borrow against future rent adjustments using their
           capital reserve accounts as collateral. Owners and industry groups
           contended that if HUD neglected to revise the OCAF adjustment
           process, owners in high-cost areas or those experiencing emergency
           cost escalations might not receive enough in subsidies to meet
           their expenses and could consider opting out of the program.
		   		   
		   Other Factors Affect Owners' Cash-Flows and Abilities to Undertake
		   Rehabilitation

           Some owners, managers, and industry groups expressed concerns that
           some HUD policies and procedures could affect the owners' cash
           flows and undermine their abilities to undertake needed
           rehabilitation of their properties. Among these were (1) late
           subsidy payment to owners, (2) high administrative costs relative
           to the number of Section 8 units in a property, (3) confusion
           about the Limited English Proficiency requirement, and (4) unclear
           or vague HUD policies and procedures.
		   
		     Late Subsidy Payments

           Several owners and HUD staff told us that project-based Section 8
           Housing Assistance Payments were frequently late, especially when
           HUD was under continuing resolutions. In November 2005, we
           reported that from fiscal years 1995 through 2004, HUD disbursed
           three-fourths of its monthly Section 8 payments on time but that
           thousands of payments were late each year.^25 Owners who are
           heavily reliant on HUD's subsidy to operate their properties are
           the most likely to be severely affected by payment delays. Owners
           reported receiving no warning from HUD when payments would be
           delayed and reported that such notification would allow them to
           mitigate the effects of a delay. In our November 2005 report, we
           recommended that HUD, among other things, streamline and automate
           the contract renewal process to prevent processing errors and
           delays and eliminate paper/hard-copy requirements to the extent
           practicable; develop systematic means to better estimate the
           amounts that should be allocated and obligated to project-based
           Section 8 payment contracts each year; monitor the ongoing funding
           needs of each contract; ensure that additional funds were promptly
           obligated to contracts when necessary to prevent payment delays;
           and notify owners if their monthly payments would be late,
           including in such notifications the date when the monthly payment
           would be made. In response to the report, HUD officials said that
           they would take actions to better predict the funding allocation
           process and develop a system to more promptly notify owners when
           payments were expected to be late.

^24The "Recognized Increased Cost" (RIC) initiative was developed by NAHMA
and a coalition of eight organizations, with the help of the consulting
firm Recapitalization Advisors, Inc.

^25See GAO, Project-Based Rental Assistance: HUD Should Streamline Its
Processes to Ensure Timely Housing Assistance Payments, [48]GAO-06-57
(Washington, D.C.: Nov. 15, 2005).

           Owners told us that when they did not receive payments on time,
           they often had to use reserve funds to cover critical operating
           expenses, leading to cash flow problems. During these periods,
           some owners delayed needed maintenance to make up for the budget
           shortfall. For example, we found in our work for this current
           report that in Baltimore, a nonprofit owner of a project-based
           Section 8 property for elderly residents delayed critical repairs
           to the boiler system when the payments were delayed. The owner
           used reserve funds that should have been used for repairs to cover
           operating costs. This situation contributed to a lower physical
           REAC score for the owner because the boiler was in need of repair.

           HUD headquarters officials told us that they had created a working
           group of HUD officials and industry representatives that would
           provide recommendations to HUD for improving its budget process to
           reduce late Section 8 payments.

           Administrative Costs Relative to Number of Section 8 Units

           HUD officials said that they require the same information and
           documentation from all owners, no matter how many Section 8 units
           they own. Therefore, owners with a few Section 8 units may find
           the administrative costs of participating in the program
           burdensome. Some of the property owners we met with confirmed this
           fact. HUD officials said that owners with larger numbers of
           Section 8 units were able to spread the fixed administrative costs
           across more units and achieve economies of scale. Most of these
           owners' expenditures went to hire dedicated staff to manage the
           program, which requires separate accounting, management,
           occupancy, and oversight systems. The owners said that they were
           also incurring costs for background checks on Section 8 applicants
           and annual tenant recertifications. For example, in Columbus,
           Ohio, a manager told us that an owner with a few Section 8 units
           decided to opt out in 2002 because of the high administrative
           costs of keeping 24 Section 8 units in a development that had a
           total of 141 units. The manager said that by opting out, the owner
           saved up to $25,000 in payroll costs and was still able to keep
           the majority of the tenants who were eligible to receive Section 8
           incentives through tenant vouchers administered by the local
           public housing agency. HUD field office staff in Columbus told us
           that for some owners who had few Section 8 subsidized units,
           keeping separate financial, management, and occupancy records for
           both Section 8 and other tenants might not be feasible.

           The January 2006 HUD commissioned study by Econometrica, Inc.,
           reported a similar finding. The study noted that owners with a
           smaller portion of their portfolio in Section 8 units incurred
           additional operating costs for maintaining staff members with the
           skills needed to administer the Section 8 program. The study
           concluded that operating a Section 8 property required
           administrative skills specific to the program and it might not be
           economically feasible for these owners to employ staff members
           with the needed skills.
		   
		     The Limited English Proficiency Requirement

           There is some concern and confusion among project-based Section 8
           owners and managers on what is required of them to comply with
           their obligations to persons with limited English proficiency.
           Under Title VI of the Civil Rights Act of 1964, and its
           implementing regulations, recipients of federal financial
           assistance have a responsibility to ensure meaningful access to
           programs and activities for these individuals. Presidential
           Executive Order 13166, "Improving Access to Services to Persons
           with Limited English Proficiency" directs each federal agency that
           extends assistance subject to Title VI to publish guidance for its
           recipients clarifying their obligations to persons with limited
           English.

           HUD published the final "Guidance to Federal Financial Assistance
           Recipients Regarding Title VI Prohibition against National Origin
           Discrimination Affecting Limited English Proficient Persons" on
           January 22, 2007. Under this guidance, recipients of HUD funds use
           four factors to determine the extent of their obligations to
           provide services to those with limited English proficiency. These
           four factors include: (1) the number or proportion of such persons
           who are eligible to be served or likely to be encountered by the
           program or grantee, (2) the frequency with which these persons
           come in contact with the program, (3) the nature and importance of
           the program, activity, or service provided by the program to
           people's lives, and (4) the resources available to the
           grantee/recipient and costs. Based on these factors, a HUD
           recipient would develop an implementation plan to address the
           identified needs of the populations they serve that have limited
           English proficiency.

           Some owners, managers, and their representatives said that they
           agreed with the goal that this group have access to HUD programs
           but that it was not clear how HUD was implementing this order.
           Particularly, these officials were concerned with the lack of
           clarity in describing the written translations and oral
           interpretation services HUD was to provide and those that would be
           the owners' responsibility. NAHMA officials stated that the
           perception was that the owners would have to bear most of the cost
           of providing the written translations of vital documents and oral
           interpretation services free of charge to both applicants and
           residents. However, these officials noted that HUD had proposed no
           additional funding to offset these higher costs. Furthermore,
           NAHMA officials said that expenses for translating documents or
           providing interpretation services were not accounted for in the
           OCAF adjustments or included in rent comparability studies.

           NAHMA officials added that they were concerned because HUD was
           already holding property owners accountable to the requirements
           for limited English proficiency as part of fair housing and
           compliance reviews. These officials stated that holding the owners
           to these requirements could expose affordable housing owners to
           unwarranted fair housing complaints and discrimination lawsuits.
           Also, NAHMA officials stated that adding this regulatory expense
           without increasing compensation changed the nature of the
           agreement between HUD and the property owner. Given this extra
           cost and additional legal liability, owners could be inclined to
           leave the program, because they would not have to deal with the
           requirement once they had opted out.
		   
		     Unclear HUD Policies and Procedures

           Some owners, managers, and industry representatives raised
           concerns about the clarity of HUD policies and procedures and the
           way the policies were applied. Of particular concern were the
           Section 8 Renewal Guide and the REAC physical inspection score.
           MAHRA established policies for renewing project-based Section 8
           contracts, and HUD adopted these regulations in 1998. The rules
           and procedures were then incorporated in the Section 8 Renewal
           Guide, which HUD published in 1999. HUD officials noted that they
           were currently in the process of issuing updates to the Renewal
           Guide. However, according to a group representing the private
           owners, only parts of the Renewal Guide had been updated despite
           many changes to HUD's policies and procedures, particularly
           regarding the Mark-to-Market and Mark-Up-to-Market program.

           Largely as a result of the out-of-date information, the guide can
           be confusing, particularly to owners that have a few project-based
           Section 8 units. Property owners and industry representatives
           cited gray areas in the guide, particularly concerning the
           Mark-to-Market option. For example, in Baltimore we visited two
           small nonprofits that owned Section 8 properties. Property
           managers for both properties faced challenges navigating complex
           HUD policies that they said the guide did not adequately explain,
           such as when and under what conditions the owner could choose a
           different renewal option. While several nonprofit groups offer
           training on HUD policies for project-based Section 8 properties, a
           property manager told us they did not have the resources to pay
           for training on their own. We also were told that a lack of
           understanding of HUD policies had caused some owners to receive
           low scores on management reviews that comprised their Section 8
           status. HUD officials told us that they had set up a task force to
           examine the guide and that it was currently being updated.

           REAC inspections are an integral part of HUD's efforts to oversee
           the properties in its inventory of affordable housing. HUD's
           physical inspections require that multifamily housing be decent,
           safe, sanitary, and in good repair. The standards establish
           specific requirements for the site, the dwelling units, and common
           areas. HUD has developed a detailed list of items that inspectors
           are required to review at properties and specifically defines what
           constitutes a deficiency for each inspected unit. However, some
           owners, managers, and representatives of multifamily housing
           industry groups we interviewed had concerns about the reliability,
           consistency, and fairness of REAC's inspections. For example,
           owners and property managers in New York City and Houston
           indicated that REAC inspectors recorded violations for minor
           issues that often were outside of the managers' control.

           Some of the owners also stated that they were cited for minor
           violations rather than for cumulative violations and that
           inspections tended to be arbitrary. For example, HUD's Chicago
           field office and a Chicago nonprofit reported that REAC inspectors
           ignored the deteriorating overall condition of a property because
           the inspectors were either inexperienced or afraid to enter some
           of the buildings. Specifically, Chicago's Lawndale
           apartments--which had one owner with 1,105 units in 104 buildings
           spread over a large area in North Lawndale--received passing REAC
           physical condition scores, although the overall complex was in
           disrepair. The end result was that Lawndale was to be split up and
           sold to a number of owners, resulting in about 700 of the 1,105
           Section 8 units leaving the project-based Section 8 program. HUD
           officials told us that because of the enormous size of the
           Lawndale apartments, the complex was not a typical HUD Section 8
           project-based property. They defended the REAC process, stating
           that the random nature of its inspections could result in passing
           scores at a large project like Lawndale, which had a mix of
           substandard and passing units. They believed that what happened at
           Lawndale was an isolated incident but that such an outlier should
           have been more carefully monitored by HUD.
		   
		   Conclusions

           Most project-based Section 8 property owners opt to renew their
           contracts with HUD, but the 8 percent of expiring contracts that
           were not renewed between 2001 through 2005 represent over 50,000
           units that are no longer subsidized through the program. Our work
           identified some recurring program issues and concerns including
           the rigidity of the one-for-one replacement requirement,
           difficulties with the OCAF adjustments and other administrative
           burdens, all of which could affect the program's positive
           retention rate as more properties come up for renewal.

           Based on the views of Section 8 owners and managers we
           interviewed, HUD's one-for-one replacement policy has made certain
           properties vulnerable to exiting the program. Particularly, not
           allowing owners to reconfigure hard-to-fill efficiency apartments
           in some markets into fewer one-bedroom units could cause financial
           difficulty for owners and lead to a decision to opt out of the
           program. Also by not allowing owners to reduce the number of units
           in a property because of the desire to have one-for-one
           replacement, HUD may inadvertently be forcing owners out of the
           program. Consistent with congressional action that eliminated the
           one-for-one replacement requirement in HUD's Public Housing
           programs, we are encouraged that HUD has started to rethink this
           policy in light of changing market conditions especially for the
           elderly, and understand the difficulty HUD faces in balancing the
           need to preserve affordable housing with the requests of property
           owners. However, without a more flexible policy, HUD risks losing
           more properties from the Section 8 program. As more contracts come
           up for renewal, owners may continue to leave the program if they
           do not have the flexibility to make changes that the market
           demands to existing housing stock. HUD's field offices, which are
           best situated to understand local market needs, may be in the best
           position to make these types of property decisions.

           The OCAF adjustment process, which is required by MAHRA, is
           another area that may threaten HUD's preservation efforts. As
           currently implemented, HUD estimates of costs for items such as
           utilities and insurance in some cases do not reflect current
           market conditions, primarily because they are estimated 15-18
           months before they take effect and are applied statewide. As a
           result, property owners in high-cost areas may not receive enough
           in subsidies to meet their expenses. Moreover, during emergency
           situations HUD does not have a process to address rapidly changing
           prices such as spikes in energy costs or rapidly increasing
           insurance rates in coastal areas. Ultimately, owners divert money
           from capital improvement projects to cover such operating
           expenses. These types of issues could result in more owners
           leaving the program. Given that many property owners emphasized
           that guaranteed rental income was a primary reason for staying in
           the program, HUD needs to help ensure that properties are covered
           for the increases in costs incurred. If HUD does not act quickly
           to review the OCAF adjustment process, property owners may be
           forced to leave the Section 8 program due to lack of sufficient
           funding.

           Finally, owners, managers, and industry representatives raised a
           number of other issues that could drive them out of the program.
           These issues included certain policies and procedures that were
           described as unclear, inconsistently applied, or administratively
           burdensome. Specifically, late subsidy payments, higher
           administrative costs for owners with fewer Section 8 units,
           confusion about requirements for persons with limited English
           proficiency, and unclear HUD policies and procedures could
           contribute to owners opting out of the Section 8 program, taking
           units that cannot be replaced out of the affordable housing stock.
		   
		   Recommendations for Executive Action

           To help ensure that project-based Section 8 preservation efforts
           meet the needs of a changing housing market, we recommend that the
           HUD Secretary direct the Deputy Assistant Secretary for
           Multi-family Housing to:

           o modify the one-for-one replacement requirement to allow for a
           case-by-case assessment of the merits of permitting owners to
           reduce the number of project-based Section 8 units or reconfigure
           the units to better meet market demand and to expand its
           reconsideration of this policy beyond elderly properties,

           o expeditiously reevaluate its OCAF adjustment process to make
           sure that the adjustments reflect local variations, are
           implemented in a more timely manner, and are responsive to
           emergency situations, and

           o determine if any of the additional issues raised by owners such
           as policies and procedures that are unclear, inconsistently
           applied, or administratively burdensome could contribute to
           owners' opting out of the Section 8 program and take steps to
           address these issues.
		   
		   Agency Comments and Our Evaluation

           We received comments on a draft of this report from HUD's
           Assistant Secretary for Housing---Federal Housing Commissioner
           that have been reproduced in appendix II. The Commissioner
           generally agreed with the report, and noted that it confirmed that
           HUD was not encouraging property owners to opt out of the
           project-based Section 8 program but rather was using a variety of
           tools to encourage continued participation. He also said that the
           report contained several positive suggestions for improving
           program delivery, but added that none of the recommendations would
           likely deter owners seeking to maximize their economic gains in a
           "hot" real estate market from leaving the program. We agree that
           most owners that opt out of the project-based Section 8 program do
           so because of market factors rather than dissatisfaction with
           HUD's preservation efforts. However, given the finite supply of
           project-based Section 8 properties, addressing some of the
           recurring program issues and concerns we identified could help
           keep some owners from opting out of the program. The Commissioner
           also noted that the report lacked data on the number of opt-outs
           that might have been avoided if the proposed recommendations had
           been implemented. We agree that such data would have allowed us to
           determine specific reasons owners opted out of the program, but
           because HUD does not track properties and the reasons that they
           leave the program, the data were not readily available.

           Addressing our recommendation that HUD modify the one-for-one
           replacement policy to allow for case-by-case assessments of
           requests to reduce the number of or reconfigure existing units,
           the Commissioner expressed concern that revising the policy might
           save one or two projects from opting out but lead to a greater net
           loss of assisted units. He added, however, that HUD was aware of
           the need to accommodate market demand and would be evaluating the
           policy and identifying criteria for approving such requests. We
           are encouraged that HUD is considering a more flexible policy and
           continue to support the position that criteria can be developed
           that balance market demand and the need to preserve affordable
           housing.

           Regarding our recommendation that HUD expeditiously reevaluate its
           OCAF adjustment process, the Commissioner wrote that the
           department was aware of industry concerns about the use of
           statewide data, the approximately 18-month lag between the time
           data is collected and the adjustments go into effect, and the fact
           that OCAF does not take into account emergency situations. He
           noted that HUD had initiated a review of the OCAF methodology,
           including the actual costs to the portfolio resulting from the lag
           time and the use of statewide data, and planned to complete and
           announce the results of the review by the end of fiscal year 2007.

           Concerning our recommendation that HUD determine if any of the
           additional issues that property owners raised could be
           contributing to the decision to opt out of the program, the
           Commissioner said that HUD was aware of the concerns we cited and
           was always willing to consider recommendations that could reduce
           administrative costs and encourage owners to stay in the program.
           For example, he acknowledged that the project-based Section 8
           payments were late from time to time but added that the agency was
           committed to improving the process and would provide updates on
           its progress to GAO and the Congress.

           We are sending copies of this report to the Chairman and Ranking
           Minority Member of the Senate Committee on Appropriations; the
           Chairman and Ranking Minority Member of the Senate Committee on
           Banking, Housing and Urban Affairs; the Chairman and Ranking
           Minority Member of the House Committee on Appropriations; the
           Chairman and Ranking Minority Member of the House Committee on
           House Financial Services; the Secretary of HUD; and other
           interested parties. This report will also be available at no
           charge on GAO's Web site http://www.gao.gov .

           Please contact me at (202) 512-8678 or williamso@gao.gov if
           you or your staff have any questions about this report. Contact
           points for our Offices of Congressional Relations and Public
           Affairs may be found on the last page of this report. Key
           contributors to this report are listed in appendix V.

           Orice M. Williams
		   Director, Financial Markets and Community Investment
		   
		   Appendix I: Scope and Methodology

           To assess the Department of Housing and Urban Development (HUD's)
           efforts to maintain Section 8 project-based housing stock and
           identify any discernable patterns in its preservation efforts, we
           reviewed the department's five-year analysis of units terminated
           and retained by year, state, and locality for the period
           2001-2005. HUD's analysis is contained in a report to Congress,
           Section 8 Project-Based Contract Renewals, sent to the Senate
           Appropriations Committee in August, 2006. To facilitate this
           effort, HUD's Office of Multifamily Programs and Systems, in June
           of 2006, provided us a data extract containing information on all
           Section 8 contract activity for the 5-year period. This extract
           incorporated and combined data from HUD's Real Estate Management
           System (REMS), which reflects historical information on all
           properties in HUD's multifamily portfolio; DATAMART, a subset of
           REMS, which depicts data for all active multifamily properties;
           and the Tenant Rental Assistance Certification System (TRACS),
           which illustrates historical activity for all multifamily
           properties subsidized department's Real Estate Assessment Center
           (REAC) database system showing the most recent physical and
           financial conditions of properties in HUD's multifamily portfolio.

           To determine the number of Section 8 project-based units renewed
           and terminated during the five year period as well as the
           characteristics and locations of their associated properties, we
           reviewed, analyzed, and replicated all numbers contained in HUD's
           report relating to Section 8 contracts that left or remained in
           HUD's portfolio during 2001-2005. By comparing renewals and
           terminations, we determined the extent to which HUD's Section 8
           project-based housing stock grew or declined. Our analysis also
           enabled us to observe patterns associated with such actions.
           Following the same methodology HUD employed in its Report to
           Congress, we counted individual contract renewals and their
           associated units only once irrespective of how many times an owner
           renewed the contract. Moreover, we only considered contracts as
           renewals if such contracts were active at the end of 2005. In
           contrast, terminated contracts included all situations where
           owners opted out of their Section 8 contractual obligations
           anytime during the 5-year period; mortgage foreclosures; and
           contracts terminated by HUD due to enforcement actions. We counted
           contractual terminations as a single event because, by definition,
           the contract no longer exists.

           We also used the database extract to analyze characteristics of
           properties that left or remained in the Section 8 Program that HUD
           did not address in its report. For instance, we evaluated the
           types of rental assistance associated with renewals and
           terminations; occupancy and unit characteristics of properties
           whose owners elected to renew or opt out of their contractual
           obligations; and the physical and financial conditions of such
           properties. In addition, to determine which geographic locations
           had what number of contract renewals or terminations, and if any
           evidence of patterns in such locations existed, we obtained census
           divisions from the Census Bureau website and mapped properties
           using the divisions. Our analysis enabled us to depict the
           locations where HUD was losing or gaining Section 8 housing stock
           at the county level.

           To ensure that the HUD data were reliable, we performed various
           electronic tests and checks to determine (1) the extent to which
           the data were complete and accurate, (2) the reasonableness of the
           values reflected in the data variables, (3) if any data fields had
           missing values, and, (4) whether any data limitations existed in
           the data we relied upon to do our work. In addition, we reviewed
           existing information about the quality and controls of the data
           systems and discussed the data we analyzed, as well as the
           programming code used to manipulate such data, with agency
           officials to ensure that we interpreted them correctly to do our
           analysis. Based upon our reliability assessment, we concluded that
           HUD's data were sufficiently reliable for purposes of this report.
           Moreover, our analysis determined that the information reflected
           in HUD's report to Congress was accurate and reliable for purposes
           of ascertaining the extent to which Section 8 contracts and their
           associated units were terminated or gained during the 5-year
           period 2001-2005. The data we obtained from HUD were current as of
           June 15, 2006.

           To identify the tools and incentives available to HUD to preserve
           project-based Section 8, we reviewed and summarized legislation
           and regulations pertaining to Section 8 project-based housing
           preservation including the [39]Multifamily Assisted Housing Reform
           and Affordability Act (MAHRA) of 1997 and the Section 8 Renewal
           Guide. To identify the incentives offered to Section 8 owners, we
           conducted interviews with HUD headquarters staff in Washington,
           D.C. and field office staff in Baltimore, Maryland; Chicago,
           Illinois; New York, New York; Los Angeles, California; Columbus,
           Ohio; and Houston, Texas. To get additional information about the
           use of these incentives, we conducted interviews with Section 8
           property owners and managers, nonprofit organizations, industry
           groups, HUD contractors, and state and local government finance
           agencies. To determine how frequently Section 8 owners used each
           tool or incentive, we extracted and analyzed data from HUD's Real
           Estate Management System (REMS) and spoke with HUD officials and
           industry groups. REMS includes historical information on all
           properties in HUD's multifamily portfolio including data on
           project-based Section 8 properties and contracts. One Section 8
           property may have multiple contracts.

           To assess the views of for-profit and nonprofit property owners
           and managers on HUD's Section 8 housing preservation efforts, we
           interviewed industry representatives and conducted case studies in
           five selected locations.^1 We judgmentally selected for review
           five HUD office locations (two regional offices and three field
           offices) in which to complete interviews with for-profit and
           nonprofit property owners and managers. Sites were selected based
           on the following characteristics: (1) percentage of units that
           opted out from 2001 through 2005, (2) vacancy rate (3) geographic
           location, (4) percentage of households with worst-case housing
           needs, and (5) HUD regional and field office program performance.
           In the selected case study locations, we conducted interviews with
           current and former project-based Section 8 for-profit and
           nonprofit property owners and managers as well as HUD office
           staff. We also interviewed performance-based contract
           administrators (PBCA), entities responsible for administering
           project-based Section 8 contracts, and participating
           administrative entities (PAE), entities responsible for
           structuring Mark-to-Market transactions, serving the selected case
           study locations. For all of our interviews, we used a standardized
           interview guide to ensure consistency. We gathered information on
           reasons selected for-profit and nonprofit property owners stayed
           in or left the project-based Section 8 program and perceptions
           about the effectiveness of HUD's tools and incentives to preserve
           Section 8 housing. We also reviewed relevant documentation
           provided by property owners and managers, HUD regional and field
           office staff, PBCAs, and PAEs.

           We conducted our work between October 2005 and April 2007 in
           Baltimore, Maryland; New York, New York; Chicago, Illinois;
           Columbus, Ohio; Los Angeles, California; Houston, Texas; and
           Washington, D.C., in accordance with generally accepted government
           auditing standards.
		   
^1These were Chicago, Illinois; Columbus Ohio; Houston, Texas; Los
Angeles, California; and New York, New York (The Bronx).

Appendix II: Comments from the Department of Housing and Urban Development		   

Appendix III: Number of Opt-outs by State in Identified Census Divisions

                                          Total    Total                Total 
                                       Eligible Property  Percentage     Unit 
Region             State          Properties Opt-outs of Opt-outs Opt-outs 
East North Central ILLINOIS                                                
Division                                 496       29        5.8%    1,381 
                      INDIANA               393       21        5.3%      781 
                      MICHIGAN              409       29        7.1%    1,859 
                      OHIO                  940       87        9.3%    3,768 
                      WISCONSIN             373       26        7.0%      871 
East South Central ALABAMA                                                 
Division                                 251       18        7.2%    1,040 
                      KENTUCKY              360       12        3.3%      310 
                      MISSISSIPPI           236        2        0.8%       58 
                      TENNESSEE             301       10        3.3%      301 
Middle Atlantic    NEW JERSEY                                              
Division                                 299       36       12.0%      512 
                      NEW YORK              843       38        4.5%    3,108 
                      PENNSYLVANIA          494        6        1.2%      127 
Mountain Division  ARIZONA                99        6        6.1%      431 
                      COLORADO              229       17        7.4%      714 
                      IDAHO                  60        6       10.0%      194 
                      MONTANA               101        1        1.0%       16 
                      NEVADA                 48       12       25.0%      374 
                      NEW MEXICO             78        0        0.0%      N/A 
                      UTAH                   77        0        0.0%      N/A 
                      WYOMING                55        0        0.0%      N/A 
New England        CONNECTICUT                                             
Division                                 180        9        5.0%      787 
                      MAINE                 103        3        2.9%       39 
                      MASSACHUSETTS         379        5        1.3%      129 
                      NEW HAMPSHIRE          84        5        6.0%      163 
                      RHODE ISLAND          129        5        3.9%      124 
                      VERMONT                49        0        0.0%      N/A 
Pacific Division   ALASKA                 22        2        9.1%       63 
                      CALIFORNIA          1,250       89        7.1%    3,095 
                      HAWAII                 58        9       15.5%      259 
                      OREGON                150        7        4.7%      112 
                      WASHINGTON            347       19        5.5%      520 
South Atlantic     DELAWARE                                                
Division                                  22        0        0.0%      N/A 
                      DISTRICT OF                                             
                      COLUMBIA              102       14       13.7%      312 
                      FLORIDA               378       13        3.4%      598 
                      GEORGIA               302       31       10.3%    1,577 
                      MARYLAND              293       39       13.3%    2,036 
                      NORTH CAROLINA        480       15        3.1%      428 
                      SOUTH CAROLINA        233       12        5.2%      317 
                      VIRGINIA              209       22       10.5%    1,827 
                      WEST VIRGINIA         121        3        2.5%       55 
West North Central IOWA                                                    
Division                                 255       35       13.7%      967 
                      KANSAS                227        7        3.1%      261 
                      MINNESOTA             325       11        3.4%      232 
                      MISSOURI              372       11        3.0%      425 
                      NEBRASKA              166        4        2.4%       34 
                      NORTH DAKOTA          148       17       11.5%      362 
                      SOUTH DAKOTA          120        3        2.5%       70 
West South Central ARKANSAS                                                
Division                                 178        7        3.9%      136 
                      LOUISIANA             164        3        1.8%      178 
                      OKLAHOMA              146        2        1.4%      322 
                      TEXAS                 543       48        8.8%    2,492 
No Regional        GUAM                                                    
Designation                                1        0        0.0%      N/A 
                      MICRONESIA              2        2      100.0%       11 
                      N MARIANAS              4        0        0.0%      N/A 
                      PUERTO RICO           155       16       10.3%    1,396 
                      VIRGIN ISLANDS          8        0        0.0%      N/A 
                                         13,847      824        6.0%   35,172 

           Source: GAO analysis of HUD data.
		   

Appendix IV: Number of Opt-outs by Metropolitan Area for the 3 Census
Divisions with the Highest Percentage of Opt-outs

                                                                Number Number 
Region   State       Metro Area                          Properties  Units 
East     ILLINOIS    CHICAGO IL                                  26  1,209 
North                                                                      
Central                                                                    
Division                                                                   
            ILLINOIS    DAVENPORT-MOLINE-ROCK ISLAND IA-IL           1     76 
            ILLINOIS    NOT IN METRO AREA                            1     48 
            ILLINOIS    PEORIA-PEKIN IL                              1     48 
            INDIANA     BLOOMINGTON IN                               1     27 
            INDIANA     EVANSVILLE-HENDERSON IN-KY                   1     40 
            INDIANA     FORT WAYNE IN                                1     94 
            INDIANA     GARY IN                                      1     65 
            INDIANA     INDIANAPOLIS IN                             12    348 
            INDIANA     LAFAYETTE IN                                 1     79 
            INDIANA     LOUISVILLE KY-IN                             1     65 
            INDIANA     NOT IN METRO AREA                            3     63 
            MICHIGAN    ANN ARBOR MI                                 2    394 
            MICHIGAN    DETROIT MI                                  17  1,191 
            MICHIGAN    FLINT MI                                     1     33 
            MICHIGAN    GRAND RAPIDS-MUSKEGON-HOLLAND MI             3     75 
            MICHIGAN    JACKSON MI                                   1     19 
            MICHIGAN    KALAMAZOO-BATTLE CREEK MI                    2     58 
            MICHIGAN    LANSING-EAST LANSING MI                      1     23 
            MICHIGAN    NOT IN METRO AREA                            2     66 
            OHIO        AKRON OH                                     5    145 
            OHIO        CINCINNATI OH-KY-IN                         46  1,397 
            OHIO        CLEVELAND-LORAIN-ELYRIA OH                  11    702 
            OHIO        COLUMBUS OH                                  7    204 
            OHIO        DAYTON-SPRINGFIELD OH                        4    426 
            OHIO        MANSFIELD OH                                 1     32 
            OHIO        NOT IN METRO AREA                           11    728 
            OHIO        TOLEDO OH                                    1     34 
            OHIO        YOUNGSTOWN-WARREN OH                         1    100 
            WISCONSIN   EAU CLAIRE WI                                1     21 
            WISCONSIN   MADISON WI                                   3    118 
            WISCONSIN   MILWAUKEE-WAUKESHA WI                       11    422 
            WISCONSIN   MINNEAPOLIS-ST. PAUL MN-WI                   1      6 
            WISCONSIN   NOT IN METRO AREA                            9    246 
            WISCONSIN   WAUSAU WI                                    1     58 
Pacific  ALASKA      NOT IN METRO AREA                            2     63 
Division                                                                   
            CALIFORNIA  BAKERSFIELD CA                               2     39 
            CALIFORNIA  CHICO-PARADISE CA                            3     77 
            CALIFORNIA  FRESNO CA                                    5    272 
            CALIFORNIA  LOS ANGELES-LONG BEACH CA                   16    580 
            CALIFORNIA  MODESTO CA                                   1     44 
            CALIFORNIA  NOT IN METRO AREA                            3     15 
            CALIFORNIA  OAKLAND CA                                   9    431 
            CALIFORNIA  ORANGE COUNTY CA                             3    179 
            CALIFORNIA  REDDING CA                                   1     48 
            CALIFORNIA  RIVERSIDE-SAN BERNARDINO CA                  4    206 
            CALIFORNIA  SACRAMENTO CA                               20    428 
            CALIFORNIA  SAN DIEGO CA                                 3    176 
            CALIFORNIA  SAN JOSE CA                                  1     79 
            CALIFORNIA  SAN LUIS OBISPO-ATASCADERO-PASO              1     22 
                        ROBLES CA                                             
            CALIFORNIA  SANTA CRUZ-WATSONVILLE CA                    1    110 
            CALIFORNIA  SANTA ROSA CA                                3    134 
            CALIFORNIA  STOCKTON-LODI CA                             4    101 
            CALIFORNIA  VALLEJO-FAIRFIELD-NAPA CA                    4     78 
            CALIFORNIA  YOLO CA                                      4     52 
            CALIFORNIA  YUBA CITY CA                                 1     24 
            HAWAII      HONOLULU HI                                  8    159 
            HAWAII      NOT IN METRO AREA                            1    100 
            OREGON      NOT IN METRO AREA                            3     17 
            OREGON      PORTLAND-VANCOUVER OR-WA                     3     87 
            OREGON      SALEM OR                                     1      8 
            WASHINGTON  BREMERTON WA                                 3     89 
            WASHINGTON  NOT IN METRO AREA                            3     75 
            WASHINGTON  OLYMPIA WA                                   2     69 
            WASHINGTON  PORTLAND-VANCOUVER OR-WA                     1     24 
            WASHINGTON  SEATTLE-BELLEVUE-EVERETT WA                  6    140 
            WASHINGTON  SPOKANE WA                                   2     72 
            WASHINGTON  TACOMA WA                                    2     51 
South    DISTRICT OF WASHINGTON DC-MD-VA-WV                      14    312 
Atlantic COLUMBIA                                                          
Division                                                                   
            FLORIDA     FORT LAUDERDALE FL                           2    166 
            FLORIDA     FORT MYERS-CAPE CORAL FL                     1     30 
            FLORIDA     JACKSONVILLE FL                              1     24 
            FLORIDA     MIAMI FL                                     1     48 
            FLORIDA     NOT IN METRO AREA                            1      5 
            FLORIDA     ORLANDO FL                                   3     48 
            FLORIDA     PENSACOLA FL                                 1    200 
            FLORIDA     SARASOTA-BRADENTON FL                        1     36 
            FLORIDA     TAMPA-ST. PETERSBURG-CLEARWATER FL           2     41 
            GEORGIA     ATHENS GA                                    2     19 
            GEORGIA     ATLANTA GA                                  21  1,445 
            GEORGIA     NOT IN METRO AREA                            1      8 
            GEORGIA     SAVANNAH GA                                  7    105 
            MARYLAND    BALTIMORE MD                                21    961 
            MARYLAND    COLUMBIA                                     1     35 
            MARYLAND    HAGERSTOWN MD                                3    141 
            MARYLAND    WASHINGTON DC-MD-VA-WV                      14    899 
            NORTH       CHARLOTTE-GASTONIA-ROCK HILL NC-SC           1    100 
            CAROLINA                                                          
            NORTH       GREENSBORO--WINSTON-SALEM--HIGH              4    132 
            CAROLINA    POINT NC                                              
            NORTH       NOT IN METRO AREA                            4     37 
            CAROLINA                                                          
            NORTH       RALEIGH-DURHAM-CHAPEL HILL NC                6    159 
            CAROLINA                                                          
            SOUTH       AUGUSTA-AIKEN GA-SC                          1     26 
            CAROLINA                                                          
            SOUTH       CHARLESTON-NORTH CHARLESTON SC               2     24 
            CAROLINA                                                          
            SOUTH       COLUMBIA SC                                  2     56 
            CAROLINA                                                          
            SOUTH       GREENVILLE-SPARTANBURG-ANDERSON SC           4     61 
            CAROLINA                                                          
            SOUTH       NOT IN METRO AREA                            2     38 
            CAROLINA                                                          
            SOUTH       SUMTER SC                                    1    112 
            CAROLINA                                                          
            VIRGINIA    LYNCHBURG VA                                 1    149 
            VIRGINIA    NORFOLK-VIRGINIA BEACH-NEWPORT NEWS          8    567 
                        VA-NC                                                 
            VIRGINIA    NOT IN METRO AREA                            4    369 
            VIRGINIA    RICHMOND-PETERSBURG VA                       3    565 
            VIRGINIA    WASHINGTON DC-MD-VA-WV                       6    177 
            WEST        CHARLESTON WV                                1     23 
            VIRGINIA                                                          
            WEST        NOT IN METRO AREA                            1      8 
            VIRGINIA                                                          
            WEST        PARKERSBURG-MARIETTA WV-OH                   1     24 
            VIRGINIA                                                          
                                                                   467 19,859 
		   
           Source: GAO analysis of HUD data.
		   
           Appendix V: GAO Contact and Staff Acknowledgments	
		   
		   GAO Contact	   

           Orice M. Williams, (202) 512-8678, williamso@gao.gov
		   
		   Staff Acknowledgments

           In addition to the individual named above, Andy Finkel, Assistant
           Director; Grace Haskins, Michelle Bracy, Emily Chalmers, Mark
           Egger, Charlene Johnson, Alison Martin, John McGrail, Marc Molino,
           and Roberto Pinero made key contributions to this report.
		   
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References

Visible links
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-04-20
  39. http://www.hud.gov/offices/hsg/omhar/readingrm/mahra.pdf
  47. http://www.huduser.org/datasets/il.html
  48. http://www.gao.gov/cgi-bin/getrpt?GAO-06-57
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