1). 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. 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. Of these, 92 percent of the eligible contracts and   95 percent of the eligible units remained in the program (table 2). 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. 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. 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 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. 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. 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. HUD’s One-for-One Replacement Policy Can Result in Fewer Units and More Opt-outs

Some owners, managers, and industry representatives told us that some  HUD practices have not always kept pace with changes in market  conditions. Therefore, owners with a few Section 8 units may find the  administrative costs of participating in the program burdensome. Property owners and industry representatives cited gray areas in the  guide, particularly concerning the Mark-to-Market option. 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:    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,    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    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. Key contributors to this report are listed in   appendix V.

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.
Why GAO Did This Study

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.

What GAO Found

GAO identified a number of patterns in the volume, characteristics, and location of HUD's project-based Section 8 housing between 2001 and 2005. During this period owners renewed 92 percent of Section 8 rental assistance contracts and 95 percent of the units covered by these contracts. While relatively few owners left the program voluntarily, most of those we interviewed did so to seek higher rents in the private market or to convert their units into condominiums. The properties most likely to leave the program were those with few Section 8 units, family-occupied units, those in poor physical condition, and those located in markets with rapidly escalating housing values. HUD offers several incentives to keep Section 8 property owners in the program. Owners that used these incentives between 2001 and 2005 most often chose the Mark-to-Market and Mark-up-to-Market programs, both of which adjust rents to conform to prevailing market conditions. Some owners used HUD programs that offered additional financing for property rehabilitation to participants in the Section 236 mortgage reduction program and the Section 202 mortgage program for housing for the low-income elderly and persons with disabilities. HUD officials, owners, and industry representatives told us that many Section 8 owners also opted to use the Low-Income Housing Tax Credit and tax-exempt bonds, both of which the IRS administers through state housing finance agencies. Some property owners, managers, and industry representatives cited concerns with certain HUD policies and practices, especially the one-for-one replacement policy for Section 8 units and the Operating Cost Adjustment Factors (OCAF) payment process. GAO found that the one-for-one replacement policy, which prohibits reductions in the total number of Section 8 units in a property when a contract is renewed, had led some owners to leave the program. Property owners noted that they could not reconfigure their properties to supply larger units that were in higher demand, especially by elderly tenants. Although not required by statute to adopt this policy, HUD did so in order to preserve as many units as possible but is reviewing it in light of the growing concerns. Owners also expressed frustration with the long delay in OCAF adjustments, the use of statewide averages, and the inability of the process to deal with emergency situations. Finally, owners offered several suggestions that may warrant HUD's attention, including improving the Section 8 contract renewal guidance and revisiting physical inspection guidelines.