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Legislative & Regulatory Update

September 12, 2014

This week, Congress ended its five week long recess, with many unresolved legislative issues still on the table. Congress will not address major policy questions because both chambers have publicly stated that they will be in session for two weeks before adjourning until after the November Congressional "mid-term" elections. Thus, the many issues that CARH is following on behalf of our members, including legislation that would extend already expired tax credits and creation of disaster credits, as well as legislation that would reform our country's tax code will not receive Congressional consideration until at least after the November elections. Some, of these matters may be addressed in November or December during a "lame-duck" Congress; others may be addressed when the new Congress meets in 2015.

Funding for both the Department of Housing and Urban Development (HUD) and the United States Department of Agriculture (USDA) Rural Development (RD) housing programs will have to be contained in a Continuing Resolution (CR), since none of the eleven Appropriations bills for the fiscal year that begins on October 1, have passed the Congress.  Until President Obama's speech on Wednesday on the situation in the Middle East, the House was posed this week to pass a Continuing Resolution (CR) continuing funding for a majority of government programs at current funding levels through mid-December.  While a CR will pass the Congress prior to the beginning of the new fiscal year on October 1, there may be a delay as Congress weighs a response to the president's military recommendations.  In December, some or all of the Appropriations bills may be passed or combined into one large omnibus bill. Regulatory policies will still be issued, but could be delayed based on political officials at agencies leaving and replacements not yet in place.

Grassroots support and constituent comments to Congressional Members is vitally important.  Your efforts only solidify the work of the CARH national office and our legislative team headed by Tom Reynolds at Nixon Peabody LLP.  Of particular effectiveness, we  suggest CARH members invite their members of Congress and their staffs to any ribbon cutting ceremonies or other celebratory events that you may have planned between now and the November election, be it completion of a rehab or even where a rehab is just beginning and you can show before and artist-rendering of after pictures.  This is the opportunity for our nation's decision-makers to see what the industry does and the important role that affordable housing plays in every rural community throughout the country.  If you haven't had an event recently, then set a once a month rule-email or call once a month just to note what a great job you are doing and invite them out to see a good property and their constituents. You may also extend such invitations to staff, both local and DC staff, who may be in the area in the run up to the election.

CARH members have been updated during the year through our broadcast email system and through CARH News on issues impacting the industry.  However, as we move through the month of September, we felt it important for CARH members to receive a more detailed update on these issues, remembering that the outcome of the November elections will determine Congress and the Administration's response.

TAX ISSUES

Tax Reform

On February 26, 2014, Representative Dave Camp (R-MI), Chair of the House Ways and Means Committee unveiled his much anticipated draft discussion for tax reform (click here to read CARH's broadcast email).  While there appeared to be some momentum when the discussion draft was made public, chances of an all-encompassing tax reform bill passing both the House and Senate became more remote as Representative Camp announced his retirement and his counterpart in the Senate, Max Baucus (D-MT), Chair of the Senate Finance Committee became Ambassador to China.  While there was not a comparable draft discussion document in the Senate, Senator Baucus and Representative Camp had held forums across the country on tax reform and, while not agreeing on all reforms, shared support for moving a major bill forward.

The new Chair of the Senate Finance Committee Ron Wyden (D-OR), remains interested in personal and corporate reform.  Nevertheless, given the time frame, it is highly unlikely that a major bill will be passed during the remainder of this Congress.  What remains of concern, however, is that once a draft proposal such as that from the Ways and Means Committee is in print, another member of Congress in another Congress could introduce legislation containing the same or substantially different recommendations.  As a steering committee member of the Affordable Rental Housing ACTION Group, a cross section of the affordable housing industry that was put together to have a united message on the housing credit program, CARH met several times and was pleased that the July comments (available by clicking here) were sent to both the House Ways and Means and the Senate Finance Committees outlining concerns over changes proposed to the housing credit program.

Tax Extenders

Thursday, April 3, 2014, the Senate Finance Committee approved the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act (click here for CARH's broadcast email on this subject), which would extend dozens of expired and expiring tax provisions.  The Senate Finance Committee passed the legislation, which includes several provisions that are important to rural housing, particularly preservation.  The legislation would:  extend the minimum 9 percent rate to Housing Credit allocations made through January 1, 2016; and extend the New Markets Tax Credit through 2014 and 2015 with an allocation of $3.5 billion.  The bill would also enact a minimum 4 percent Housing Credit rate for the acquisition of affordable housing for allocations made before January 1, 2016.  It is unlikely that the full Senate will take up this legislation prior to the November elections.

A separate bill, S. 1442, Improving the Low Income Housing Tax Credit Rate Act, introduced by Senator Maria Cantwell (D-WA) would make permanent and expand the temporary minimum credit rate for the 9 % and 4 % housing tax credit.  The House of Representatives, prior to the August recess, passed a series of bills that would permanently extend several expired tax provisions.  Representative Pat Tiberi (R-OH) on May 22, 2014, introduced legislation, H.R. 4717, which would permanently extend the minimum credit rate for the 9% and the 4% housing credit.  The House Ways and Means Committee has not scheduled a mark-up on Representative Tiberi's bill or other expired tax provisions beyond those that have already passed the Committee or the House.  Both S. 1442 and H.R. 4717 have a number of cosponsors (S. 1442 co-sponsors; H.R. 4717 co-sponsors).  CARH members are urged to contact their Senators and Representatives if they are not yet on the list of cosponsors and ask them to cosponsor the housing credit bills.  It is important to show support for these bills, should a tax extender bill be considered after the November elections.

Disaster Related Tax Bills

Legislation has been introduced in both the House and the Senate to provide tax relief to states impacted by natural disasters from 2012 through 2014, which would include additional Housing Tax Credit and New Markets Tax Credit allocations.  On July 11, 2014, Representatives Bill Pascrell (D-NJ-9^th) and Tom Reed (R-NY-23^rd) introduced the National Disaster Tax Relief Act of 2014 (H.R. 5082), with strong bipartisan co-sponsorship. On July 22, Senator Mark Pryor (D-AR) and Senator David Vitter (R-LA) introduced companion legislation (S.2634), also with bipartisan support. Senator Pryor's bill is similar to Senator Schumer's previously introduced disaster tax relief bill (S. 2233).  However, while S. 2233 covered disasters through 2013, S. 2634 also includes disasters from 2014.  These bills could be added to a larger tax extender bill, but again only if there is support from a large number of members from the House and Senate.  If you are a CARH member located in a state where there was a declared disaster (click here for a list of those states), and your Representative/Senator is not yet a cosponsor (H.R. 5082 co-sponsors; S. 2634 co-sponsors), you need to urge them to cosponsor these bills.

FISCAL YEAR (FY) 2015 FUNDING FOR THE US DEPARTMENT OF AGRICULTURE (USDA) AND DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD)

As outlined earlier, since none of the eleven Appropriations bills for FY2015 have passed the full House and Senate, a short-term Continuing Resolution (CR) will keep the government funded through the November elections.  Absent any special instructions that would change specific spending, referred to as an anomaly, funding for government operations for FY2015 will remain at FY2014 levels, where allocations to agencies for programs will then occur by the Office of Management and Budget (OMB) at the same rate of spending as last year.

USDA/Rural Development Housing Programs

Both the House and Senate Agriculture Appropriations Committees have reported their versions of the Agriculture, Rural Development, Food and Drug Administration and Related Agencies Appropriations Act for FY 2015 (H.R. 4800 and S. 2389).  As CARH members can see from the attached chart, while funding levels in the two bills are very similar, they are not identical and the differences will need to be addressed.  This reconciliation between the bills should occur when the full House and Senate take up their respective bills or when conference occurs.

For rural rental housing, perhaps the most significant issue is the Section 521 Rental Assistance (RA) Account.  The Administration requested $1.088 billion, which the House adopted; the Senate has recommended $1.093 billion.  These amounts are less than the $1.110 billion appropriated in FY2014.  Of immediate concern is whether the funding recommended by either Committee will be sufficient to fund all existing contracts and at the same time also enough RA for preservation activities.  The Administration, in its budget request, proposed reducing the RA account by $21 million below the FY2014 level, and stated the difference would be made up with residents paying a $50 minimum rent, and a prohibition on "re-renewals."  There was also a provision giving the USDA Secretary broad discretion in renewing RA contracts, ostensibly to prioritize renewals in the event of future shortages. USDA asked for this discretion to help create flexibility.

Both the House and Senate rejected the $50 minimum rent and the proposed USDA Secretary discretionary language.  However, the House and Senate did agree to the proposal that RA contracts are to be funded for one year durations and that they cannot be re-renewed, or renewed a second time, during this 12-month time period.  Taken on its face, instead of increasing USDA discretion, this language removes what little discretion USDA had with contracts.  USDA must renew every RA contract for 12 months and must do so at a level sufficient to avoid re-renewals.  It would appear that it is now incumbent on RD field staffs to approve budgets to fund 12 months of operations.  Certainly, it is now more important than ever for owners and managers to fully fund all RA contracts, including adequate funding needed for any preservation activities, so there is no second budget or second RA renewal later in the year.

CARH authored, together with many other affordable housing groups representing a cross section of rural housing interests, a letter regarding this issue to the Appropriations Committees (click here to for the letter to the House appropriators and click here for the letter to the Senate appropriators) and to Tony Hernandez, the Administrator of Housing and Community Facilities (click here for a copy).  Should the provision stay in the Appropriations bills, we want to ensure that properties and residents in these properties that may face a short-fall are not faced with same uncertainty as those that were impacted by sequestration in FY 2013.

Department of Housing and Urban Development

As with the USDA funding bills, both the House and Senate Appropriations Committees have reported their versions of the Transportation, Housing and Urban Development and Related Agencies Appropriations Act for FY2015 (H.R. 4745 and S. 2438).  CARH is particularly concerned with funding for the HOME program, Rental Assistance Demonstration (RAD) and Section 8.  As CARH members can see from the attached chart, under H.R. 4745, HOME would be cut to $700 million from the Administration's requested level of $950 million, which is also $300 million less than the FY2014 funded level.  S. 2438 would fund the HOME program at the Administration's requested level of funding.  We are also working with other groups to help provide HUD with the flexibility to implement RAD and raise the unit limitation on the first component and secure HUD's small funding request.  RAD second component is also a concern as program authority expires at the end of 2014.  The Senate HUD bill noted above contains a provision to the end of 2016 and easier use of project based rental assistance or PBRA (with a new 20 year term and operating cost adjustment factor rent increases. CARH is also concerned, if not for FY2015 then for FY2016, that project based Section 8 be fully funded.  Currently, HUD is using administrative measures to close funding gaps but those will likely be exhausted in the near term.  Of course, CARH continues to work on, other measures such as the tenant-based voucher resources and HUD's small loan risk sharing program.

REGULATORY ISSUES

As with any second-term President, key officials within the Obama Administration are starting to leave their posts for jobs outside the government (click here for information on Carole Galante departing) or new players assume key positions in order to increase work credentials on a national basis (click here for information on Julian Castro and Shaun Donovan).  While these changes should not affect the day to day workings within agencies, there can be a slow down on regulatory approval because the players have not yet been named or if Senate confirmation is needed, the Senate Committees and therefore full Senate will not hold confirmation hearings until well into the next Congress.

USDA/RD-HOUSING ISSUES

Management Fees

On August 11, 2014, the national Rural Development (RD) office informed CARH and other industry groups that they will allow an increase in the management fee limits for 2015.  While not official until a Procedural Notice (PN) is issued by RD, state offices were informed that they should notify borrowers to include the increase in the budgets currently being prepared for 2015.  Management fees will vary from state to state because RD intends to use HUD's Operating Cost Adjustment Factor (OCAF) which varies based on location in the country.  (Click here for a chart that provides states' fee adjustment.)  The adjustment is being made to 2011 fees, the last time that the agency allowed for an increase.

As CARH members know from a myriad of emails to members, the most recent sent April 23rd (click here to see the broadcast email that includes previous emails and supporting material, including the April 11^th cover letter, Management Fee Worksheet and Management Fee Analysis that was presented to RD), CARH has been advocating an increase in fees and has met with various national RD office staff to lay out justification for the increase.  The proposal submitted by CARH and developed by CARH's past presidents, Bill Shumaker and Kevin Flynn, with input from CARH's management committee and supported by other industry groups, supports the use of an OCAF adjustment for the base fee rather than a survey that the agency has been using for the last several years.  CARH's proposal also included Base Fee Boosts, as well as Add-on Fees.  In addition, CARH suggested that a survey be conducted every five years to determine if the OCAF needed some further adjustment.  These points were not included in RD's initial notification, but RD has informed CARH that the agency is working on further policy revisions that would include many of the elements developed by CARH and the industry, which will be outlined in the next several weeks and hopefully presented to the industry for additional input.  CARH appreciates RD taking this important first step in working through important management fee issues.

Underwriting and Preservation

On September 30, 2013, the National RD office issued an Unnumbered Letter (UL) that is intended to provide guidance on underwriting policies for multifamily transactions.  This UL was not released by the agency until November 2013 due to the government shut-down last year.  The policies contained throughout the UL will not perpetuate preservation but will negatively impact a portfolio of affordable housing that needs preservation capital.  In addition, the UL if not substantially changed will create material barriers, set unrealistic standards and separate RD from many common sense approaches used in the reservation of affordable housing by entities across the country.

CARH together with a cross section of interests groups representing affordable housing, have relayed our concerns with the UL to the national RD office first in a letter (click here for a copy) and then in a series of meetings.  An issue brief (see attached) on the subject was also prepared and distributed to key Congressional offices. National office officials have indicated that portions of the UL will be revised, but the industry has not yet had an opportunity to see those revisions.  The UL expires at the end of September.  If a revised UL is not issued prior to expiration, the existing policies would stay in effect until a new UL is issued.  A host of issues are presenting themselves as owners attempt to recapitalize complexes and transactions are being jeopardized because of policies. Policy issues impeding preservation transactions include a rejection of third party soft debt in favor of hard debt, which increases financial strain on the owner and projects. Soft debt, paid as a percentage of net cash flow usually, is a benefit to the project and by extension, RD as lender and subsidy provider.  A related issue is RD's new calculations of return to owner (RTO), resulting in proposed RTOs insufficient to meet project financial obligations, including soft debt.  Also, RD's objection to tiered rents has become an issue preventing several transactions because, in sum, certain unit rents are not higher. It has become even more important that oversight hearings specifically targeted at RD's preservation policies be held by the Senate Banking Committee as well as the House Financial Services Committee.

Section 538 Guaranteed Rural Rental Housing Loan Program

CARH has been the main advocate for the Section 538 Guaranteed Rural Rental Housing Program since the program was first created in 1996.  When threatened with elimination by the Administration in FY2012, CARH's members worked to continue the program through instituting fees which made the program revenue neutral.  Since that time, CARH has advocated eliminating the Notice of Funds Availability (NOFAs) process and allowing applications be submitted throughout the year.  Borrowers and lenders have indicated that the NOFA process has delayed the processing of applications, resulting in the under-utilization of the program.

On August 18, 2014, CARH authored with other interest groups representing borrowers and lenders a letter to the Ginnie Mae asking that the agency enhance its securitization for Section 538 loans by raising the current 50 % loan-to-cost threshold to a 70% loan-to-cost threshold. In that letter to the President of Ginnie Mae, Theodore Tozer (click here for a copy), the groups indicated that the increase to 70% loan-to-cost will allow the industry to increase usage closer to the optimal $150 million level that has been budgeted for the program and then opening up the possibility of using 4% housing credits with tax exempt bonds for new construction Section 538 transactions.  A letter was also sent to the Administrator of Housing and Community Facilities, Tony Hernandez, asking him to also weigh-in with Ginnie Mae and support the change.

HUD HOUSING ISSUES

Multifamily Staff and Office Changes

HUD's Headquarters asset management office has been reorganized into the Office Asset Management and Portfolio Oversight (OAMPO), with John Hall as Deputy Director.  Division Directors will be Steve Martin for Assisted Housing Oversight, Michael Somerville for Multifamily Asset and Counterparty Oversight, Kerry Hickman for Field Asset Management and Program Administration, Scott Beardon for Property Disposition and Aaron Hutchison for Business Relationships and Support Contracts.

OAMPO currently plans to revise the HUD 2530 regulations, and continue a policy started last year of referring troubled properties with under 30 Real Estate Assessment Center (REAC) scores, or two consecutive under 60 REAC scores, to the Departmental Enforcement Center.

HUD Multifamily Production is moving to a single underwriter model and OAMPO is working to move to an Account Executive Model or single point of contact. Congress directed HUD to not further consolidate the multifamily asset management field offices at this time. Still, HUD continues its move to the five region structure for HUD's Multifamily Productions and Operations offices.

There is a new emphasis on enforcement for failing REACs.  HUD is performing some REACs more frequently where there have been local complaints. HUD issued Notice 2014-5, Limited Denial Of Participation (LDP), notifying the public that HUD is again looking at LDPs as an enforcement tool.  The LDP notice institutes a show cause process.  Failure to respond to a show cause notice could result in an LDP.

The FY2014 Transportation, HUD Appropriations Act provides at Section 230 for enforcement where a multifamily property receives a REAC score of 31-59 and fails to correct deficiencies within 60 days, or any REAC of 30 or below.  Enforcement means, after notice and opportunity to respond, if there is still noncompliance imposition of civil money penalties, HAP abatement, or for HUD seeking a project transfer or receivership. The same language is in the pending FY2015 Appropriations bills, noted above.

RAD

HUD is pushing ahead with the RAD program, as noted above.  There is an ongoing learning experience for the industry but HUD has posted a very useful website.  A major issue is the recent imposition of Davis Bacon wage rates.  HUD's Office of Public and Indian Housing (PIH), issued a new project based voucher (PBV) rule on June 25, 2014.  The preamble of the rule applies Davis-Bacon to certain "existing housing".  PIH administers PBVs, including in the RAD program.

Section 8 Renewals

On August 28, 2014, HUD issued a new waiver memo, authorizing field offices to more fully implement Chapter 15 of the Section 8 Renewal Guide, permitting rent increases as part of preservation.  Waivers include allowing for-profit entities to use same standards as non-profit entities under Chapter 15;  permitting a 20 year HAP renewal under Options One through Four; and allowing projects with a below 60 REAC under Chapter 15 as long as there is evidence that the HUD rent increase will support work that will raise the REAC above 60.

While HUD is making Section 8 preservation easier in certain ways, HUD staff also has new rent increase sensitivity.  For example, HUD is seeking justification for rents on LIHTC projects with Section 8 to exceed LIHTC rent limits.

HUD has been having difficulties ordering new Rent Comparability Studies (RCS) in a timely manner, due to budget limitations.  To address this, at least in part, HUD is implementing a policy of waiving the second RCS for Mark-up-to-Market Section 8 projects processing with a new MAP loan.

HUD is working on revised guidance to its Section 8 Renewal Policy Guide and HUD Handbook 4350.1.  This will update guidance affecting preservation, mortgage modification, tenant relocation, project insurance and casualty loss standards, HAP renewals and more.  HUD has been reaching out to industry associations, including CARH, over the summer and the industry has been responding with comments.

CARH's board of directors will be meeting in Washington next week.  All of the issues outlined in this document will be discussed with either members of Congress or their staffs and with key officials with RD and HUD.  Again, we cannot emphasize the continued need for CARH members to reinforce efforts with grassroots support both in terms of communications with your members of Congress and face-to-face meetings be they at ribbon cutting ceremonies or visits to properties.  We will continue to update the CARH membership on any developments.  If you have any questions or feedback from your meetings please relay this information to the national CARH office at 703-837-9001 or carh@carh.org.