The Purchase and Sale of Project-Based Rental Assistance Properties

By Chelsea Glynn

Chelsea Glynn is a real estate attorney with Foster Garvey PC in Portland, Oregon.

The United States has been experiencing a housing crisis for decades, and, as a result of high interest rates and low inventory, the crisis has grown in recent years. In an effort to promote affordable housing, the Department of Housing and Urban Development (HUD) offers incentives for real estate investors to become owners of affordable multifamily housing, including providing long-term project-based rental assistance (PBRA) to make units more affordable to families. U.S. Dep’t of Hous. & Urb. Dev., Increasing the Supply of New Affordable Housing: A Primer of Strategies to Implement Today 15–16 (Oct. 2023), https://tinyurl. com/28xd2js3.

Although many are familiar with the portable tenantbased Section 8 housing vouchers, project-based vouchers differ in that they are associated with a specific property rather than able to be used for any unit in the United States. Each project-based Section 8 property works through a Housing Assistance Payments contract, or HAP Contract, under which HUD, through the public housing agency contract administrator, provides funding for the subsidy if the property owner follows certain program requirements. Project-based rental assistance provides over 1.2 million low-income families with affordable housing; without this assistance, many currently affordable properties would either convert to market-rate rentals or would be unable to generate enough rental income to continue operations. Off. of Hous., Dep’t of Hous. & Urb. Dev., Project-Based Rental Assistance, at 21-2 (2021), https://tinyurl.com/mwc6xnjr.

In this era of escalating housing costs and a growing affordable housing crisis, PBRA properties play a crucial role in providing stable and affordable housing for low-income families. The ability to transfer PBRA properties ensures that this affordable housing can continue within the community. Although many aspects of a transaction involving PBRA property may be familiar to most real estate practitioners, there are some unique intricacies in which attorneys can play a critical role in advising and facilitating these transactions effectively.

History

The legal framework involving PBRA properties is the product of decades of changing policies. Federal housing programs have evolved in response to economic, political, and social circumstances, beginning with construction and financing programs for housing in response to the Great Depression. Maggie McCarty, Cong. Rsch. Serv., R41654, Introduction to Public Housing, at 2 (Jan. 3, 2014), https:// tinyurl.com/4ybneja3. In 1934, Congress passed the National Housing Act, creating the Federal Housing Administration, which established mortgage insurance programs to stop bank foreclosures on family homes. Adam Hayes,

National Housing Act: Overview, Impact, Criticisms, Investopedia (June 30, 2022), https://tinyurl.com/ku3c6je5. The Housing Act of 1937 then created local public housing agencies (PHAs) throughout the country and funded construction of public housing units, which were operated by the PHAs. McCarty, supra, at 2.

In the 1950s and 1960s, the federal government transitioned to programs that incentivized private investors to create new affordable housing, primarily with low interest rates or other subsidies. Nat’l Low Income Hous. Coal., A Brief Historical Overview of Affordable Rental Housing, 2024 Advocates Guide, at 1-7 (2024), https://tinyurl.com/mvtsuwfr. Initially, the Federal Housing Administration supported project-based assistance by subsidizing owner’s mortgages, which in turn reduced the cost of developing affordable housing. Nat’l Pres. Working Grp., Project-Based Rental Assistance [hereinafter Project-Based Rental Assistance], in 2024 Advocates Guide, supra, at 4-88. As a condition of these mortgage subsidies, owners agreed to rent restrictions and tenant income limits. Id.

To offer affordability beyond what the mortgage subsidies were providing, Congress enacted project-based rental assistance programs, including the Section 101 of the Housing and Urban Development Act of 1965 Rent Supplement Program (Rent Supp) and the Section 236 Rental Assistance Program (RAP), in which HUD set the rent level, of which the tenant paid 30% of the tenant’s adjusted gross income and the subsidy paid the remainder. Id. at 4-88 to 4-89. Through the Rental Assistance Demonstration program (RAD), the properties under Rent Supp and RAP contracts converted to long-term rental assistance Section 8 project-based housing operated by public housing authorities and overseen by HUD under a Housing Assistance Payment (HAP) contract. U.S. Dep’t of Hous., Off. of Recapitalization, Fact Sheet for Public Housing Authorities and Owners of Section 8 Moderate Rehabilitation (Mod Rehab) or McKinney Mod Rehab Single Room Occupancy (SRO) Properties Converting Under the Rental Assistance Demonstration (RAD) (released Jan. 2018).

From 1974 to 1983, developers created more than 800,000 project-based rental assistance units. Nat’l Pres. Working Grp., supra, at 4-86. In 1983, however, Congress repealed authorization for new construction. Id. In May 1999, HUD began transferring administration of Section 8 contracts to thirdparty contract administrators, such as housing authorities. Id. at 4-88. Currently, no new HAP contracts are being awarded, though owners generally have the right to renew the HAP contracts so the property can continue to provide affordable housing to its tenants. Id. at 4-87.

HAP Contracts

Existing PBRA properties continue to provide crucial affordable housing through the renewal of HAP contracts. Under a HAP contract, a property owner contracts with HUD or a PHA to provide affordable units. HUD pays subsidies to the owner to make up the difference between the low income-based rents charged to its tenants and previously agreed-upon contract rents. Cong. Rsch. Serv., The Section 8 Project-Based Rental Assistance Program, In Focus, Dec. 11, 2023, at 1. The initial term of the HAP contract may be up to 20 years. 24 C.F.R. § 983.205(a).

To be eligible to rent in PBRA housing, a tenant must generally have a household income at or below 50% of the local area median income (AMI), and at least 40% of the units must be made available to households having an income at or below the greater of 30% of AMI or the federal poverty guidelines. Cong. Rsch. Serv., supra, at 1.

As a condition to payment of such subsidies, the HAP contract imposes additional requirements on owners to ensure the quality and accessibility of such housing. Owners must maintain the units in accordance with housing quality standards governing the habitability of the units. Form HUD-52641, pt. B, sec. 3. The housing quality standards cover aspects such as space, security, plumbing, electrical systems, heating, cooling and ventilation, and structural integrity, and contain specific criteria that each unit must meet to be considered habitable housing. See 24 C.F.R. § 5.703. The HAP contract also requires that the owner not discriminate against any person because of race, color, religion, sex, national origin, age, familial status, or disability and cooperate with the PHA and HUD in compliance reviews and complaint investigations. Form HUD-52641, pt. B, sec. 9.

Additionally, the HAP contract grants HUD and the PHA broad access to the property and owner records. PHA, HUD, and the Comptroller General of the United States have full and free access to the contract unit and the premises and to all accounts and other records of the owner that are relevant to the HAP contract. Id. sec. 11. Meeting these obligations may require considerable time and effort for property owners.

Benefits of Owning PBRA Property

Despite these additional obligations imposed on owners, PBRA housing can offer a level of stability to owners that non-PBRA housing often cannot. The PHA pays the federally subsidized portion of rent directly to the owner each month, and its renters are incentivized to pay their portion of rent on time to avoid losing certain benefits. This combination generally creates a stable cash flow that owners can rely on.

On top of that, affordable housing will remain in great demand for the foreseeable future, so PBRA property owners can typically expect to sustain high occupancy rates. These benefits are in addition to the improvement the owner is making to the community by offering affordable housing to those in need. Although no new HAP contracts are being awarded, they can be renewed in one, five, or 20-year increments and assigned to a new owner.

Buying and Selling a PBRA Property

Because there is a limited supply of PBRA properties but a high demand for low-income housing, purchasing a PBRA may be of interest to certain real estate investors. Although many aspects of such transactions will be familiar to real estate practitioners, they do present a unique set of challenges.

To transfer ownership of a PBRA property, the PHA must agree to the assignment of the HAP contract. Therefore, if the owner of a property with a HAP contract decides to sell the asset, information must be submitted to the PHA in advance of the sale and the buyer also must agree to be bound by and comply with the terms and provisions of the HAP contract. Therefore, owners wishing to sell and buyers wishing to assume the HAP contract must each supply all information as requested by the PHA. Id. sec. 14.

The agreement that the new owner will comply with the HAP contract must be in a form acceptable to the PHA. HUD generally will provide a form “Assignment or Assumption of Housing Assistance Payments (HAP) Contract” and require it to be executed by the parties as part of the sale. If the buyer fails to provide the PHA with an acceptable form of assignment, the HAP contract will terminate on the effective date of the ownership change. Therefore, it is important to account for review and execution of the Assignment and Assumption of HAP Contract as part of closing the sale in addition to an assignment of the leases.

There is also additional due diligence that a potential buyer may want to conduct before closing on the sale. This includes obtaining copies of the leases and the HAP contract to be assigned and reviewing them to ensure that the buyer has a complete set of documents. Buyers also can contact the PHA to confirm the continued eligibility of the property on the program before closing on the purchase. The parties will want to take into account these extra steps when structuring the transaction timelines set forth in the purchase and sale agreement.

Finally, to avoid unexpected repairs, the buyer should inspect the property for compliance with housing quality standards and, if there are deficiencies, it should consider requesting they be corrected or an adjustment made to the purchase price.

Because of the assignment of the HAP contract associated with the sale, transactions involving PBRA properties require advance planning for assignment of the HAP contract and necessitate close collaboration and communication between the buyer, the seller, and the PHA. Advanced planning and open communication will facilitate a smooth transfer of ownership.

Summary

The acquisition and disposition of PBRA properties present unique opportunities and challenges. While the obligations associated with HAP contracts and HUD regulations can present obstacles to be overcome, the potential for stable income streams and a positive community impact nonetheless render PBRA transactions compelling opportunities for investors and legal professionals. By understanding the intricacies of these transactions and conducting thorough due diligence, buyers and sellers can successfully navigate this market and contribute to the preservation of much needed affordable housing.