Just in time for Christmas and Hanukkah, Congress is set to deliver relief to owners of HUD-assisted properties that participated in HUD’s Mark-to-Market (M2M) Program. The FY 2023 Omnibus funding bill, which is expected to pass this week and be signed by President Biden, includes a provision that has long been sought by the affordable housing community.
The M2M Program was most active in the late 1990s and early 2000s. Under this program, the rents on approximately 2,000 project-based Section 8 contracts were reduced to market rent levels, and if the property had Federal Housing Administration (FHA)-insured financing, the FHA debt was restructured so it could be supported by the lower rents. While there was a rehabilitation component of the program, in many cases, only very moderate repairs were undertaken at that time.
As a part of the program, owners entered into 30-year use agreements. The Department of Housing and Urban Development (HUD) has taken the position that the projects that went through this program could only receive OCAF increases (which is essentially a “cost of living” increase) for the term of those use agreements. This rent limitation, along with the growing operational and rehabilitation needs of these properties, has resulted in some buildings struggling to maintain solid financial and physical conditions.
For many years champions of affordable housing, including the Institute for Responsible Housing Preservation and the National Leased Housing Association, have pushed HUD and Congress to address this issue. Finally, this year’s Presidential budget proposal included language to allow for budget-based rent increases. Fortunately, both the House and Senate agreed to the language as well.
Although the statutory language does not mention distressed properties, the explanatory statement accompanying the bill suggests that HUD provide this relief to projects that are “distressed or at risk of becoming distressed.” HUD will review data from Management & Occupancy Reviews as well as Real Estate Assessment Center (REAC) physical inspections to assess the physical and operational needs amongst post-M2M properties. The industry will have to await HUD implementation language to apply under this authority.
Nixon Peabody will continue to monitor developments and provide updates as HUD issues further guidance.