Section 8 Reform Offers Opportunity for Nonprofits

Over the next decade, subsidies on nearly 900,000 units of Section 8-supported, FHA-insured housing in 8,500 projects will expire. These properties with rents above Fair Market Rents are candidates for the benefits of S. 513, the Multifamily Assisted Housing Reform and Affordability Act of 1997 introduced by Senator Connie Mack (R-FL). Patterned after last year’s legislation, S. 513 moves in a positive direction toward realigning the subsidies paid to owners of this valuable affordable housing stock.

Generally, S. 513 supports the fundamental assumption that it is unwise policy and a waste of scarce housing funds for HUD to pay rents in excess of what the private market can bear. The most thoughtful policy in regard to this is a careful reduction in both the rents and the mortgages on these properties carried out by a responsible party with a long-term commitment to affordable housing. The interests of residents and communities should not be entirely subsumed by concerns about HUD’s budget and the financial interests of property owners.

The bill proposes to allow public agencies at the state and local level to restructure the mortgages on eligible properties. The Enterprise Foundation supports giving priority to public entities to administer the renegotiation of the mortgage. Although this is a sensible approach, qualified locally-based nonprofit organizations also can play a useful role. Their nonprofit status and affordable housing mission allow these organizations to easily preserve a project’s affordability. Without the pressure to maximize cash flow, nonprofits can maintain the physical condition of the property for the long-term with no incentive to convert it to market rate. And as part of a broader anti-poverty strategy, nonprofits can link residents to social services and job training.

The bill attempts to control restructuring and rehabilitation costs by imposing a $5,000 per unit limit on rehabilitation costs. The Enterprise Foundation has suggested that Senator Mack add a provision allowing the Participating Administrative Entity (PAE) an exemption where a property merits higher rehabilitation costs because of its value to the community.

Much has been said about the tax implications to owners who choose the restructuring alternative. Congress should consult with the Internal Revenue Service so owners are certain of the tax consequences of restructuring options. Owner opposition to these transactions will make the restructuring process much more difficult. Tax deferrals for owners, however, should be conditioned on the transactions’ fulfilling a public purpose, such as a transfer to nonprofit or local government ownership.

Similarly, The Enterprise Foundation supports long-term affordability requirements for projects that go through restructuring. FHA’s willingness to write off debt should depend on long-term public benefits. PAEs should determine the mixture of tenant incomes that works best for each property and community, with limits on rent increases for the life of the restructured mortgage.

Protecting the affordability of the HUD-assisted portfolio without losing units to demolition or market rate rent structures is crucial to the viability of the low-income areas where these properties are located. Adding to the complexity of this problem, it is essential to make the best use of limited federal resources. Regardless of the details of the debate, these are the parameters within which to conduct the policy discussion about how to maintain this valuable affordable housing resource.

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