Why do we need PETRA?
Today, 6 million people pay more than half their incomes for housing, and family homelessness is on the rise. But in the last 15 years, the country has lost 150,000 units from its stock of public and assisted housing through sale or demolition.
To President Obama, failing to preserve these resources for the next generations is not an option. That's why his administration has proposed the Preservation, Enhancement and Transformation of Rental Assistance Act (PETRA) â€“ to reform America's public housing system and transform the way the Federal government provides rental assistance to more than 4.5 million of our most vulnerable families.
Having successfully worked to increase and preserve affordable housing in Chicago and New York City using a combination of public and private resources, President Obama and Secretary Donovan know we can build a better system â€“ one that harnesses the resources of the private market without compromising the important mission of publicly-supported housing.
PETRA would bring this proven strategy for preserving affordable housing to the Federal government by enabling federal housing programs to leverage $7 billion in other capital in the first yearâ€”and as much as $27 billion in the years to comeâ€”giving owners of affordable housing access to the resources they need to preserve this housing into the future. Just as importantly, PETRA embodies the Obama Administration's commitment to more robust tenant protections and strong provisions that keep public housing publicly owned and affordable to the people who need it the most.
What are the benefits of the Section 8 project-based funding stream versus the existing funding streams in public housing?
There are many advantages to moving public housing to a Section 8 project-based funding stream:
- Public housing capital needs. The key to meeting the current and ongoing capital needs (unmet capital needs estimated at $20 - $30 billion) of HUD's public housing portfolio lies in shifting from the federal capital and operating subsidy funding structure we have today â€” which exists in a parallel universe to the rest of the housing finance world â€” to a federal project-based subsidy that unlocks the value of the equity in public housing properties. There is no likely alternative way to raise the capital that this basic change will leverage from public and private sources.
- Streamline and simplify. PETRA is intended to move properties assisted under these various programs toward a more unified funding approach, governed by an integrated, coherent set of rules and regulations that better aligns with the requirements of other of federal, state, local, and private-sector financing streams. We must streamline and simplify our programs so that they are easier for families to access, less costly to operate, and easier to administer at the local level.
- Market discipline. Bringing market investment to all of our rental programs will also bring market discipline that drives fundamental reforms. Only when our programs are truly open to private capital will we be able to attract the mix of incomes and uses and stakeholders necessary to create sustainable, vibrant communities.
- Resident choice. We will combine the best features of our tenant-based and project-based programs to support resident choice and mobility. PETRA reflects HUD's commitment to complementing resident choice with the benefits that a reliable, property-based, long-term rental assistance subsidy can have for neighborhood revitalization efforts and as a platform for delivering social services.
Program Costs, Leveraging Potential
What is the estimated cost to convert public housing to assistance under PETRA?
The estimated cost to convert all public housing to assistance under PETRA is approximately $1.26 billion annually above the 2011 requested funding levels for the public housing program, taking into account both the operating and capital fund programs. For the first phase of conversions, the 2011 Budget request is $290 million out of the total of $350M requested for TRA. This amount represents the difference between subsidy provided under the legacy programs and the amount of subsidy that will be needed to fund property-based contracts in the market-based rent-setting framework proposed in PETRA.
What is the potential for leverage associated with this increase in subsidy?
For the first phase of conversions, we expect PHAs to be able to leverage approximately $7 billion. Overall, the leverage potential taking into account public housing properties only is approximately $27 billion.
Priorities and Options for Conversion
Which Public Housing developments will be prioritized for conversion?
Conversion to PBV or PBC assistance is voluntary â€” whether to convert is entirely at the option of the owner. We think the door should be open to all public housing agencies, and that in the first phase it is important to allow a variety of properties to convert so that we can learn as much as possible about how to fine tune the initiative for later phases.
That said, preservation is a central goal of the initiative, and we fully intend to prioritize scarce resources for properties at risk of loss in the near term. For many properties, however, the capital that can be raised through a market-based rent policy will not be sufficient on its own, particularly if PHAs determine that the best strategy for a property is to replace it rather than rehabilitate it. Like other affordable housing properties, these properties will need to access additional capital through the Low Income Housing Tax Credit, HOME grants, housing trust funds (state, local, and perhaps soon federal), or other sources. Based on the experience of the initial phases of TRA as well as the Capital Needs Study, HUD will have the more complete data needed to assess whether additional tools are needed to complete the process of preserving public housing.
Why provide the option to convert to either project-based vouchers (PBVs) or a new form of project-based contract (PBC) assistance authorized by PETRA?
Our long-term vision entails a gradual movement toward a mixed-income model, in which deeply affordable rental housing is part of the housing market mainstream. This housing is developed, financed, owned, and managed by public housing agencies and private entities that match rental assistance with private capital to produce and preserve housing that's responsive to local need and that looks and feels much like market-rate housing.
The project-based voucher program is an existing tool that helps us to move toward that vision. With a few exceptions for properties serving elderly households and households eligible for social services, the PBV program is now â€” and should remain â€” exclusively a mixed-income tool. One of the benefits to HUD - and to owners - of the PBV program is that our oversight can be somewhat less intense, because the presence of market-rate units helps to assure that owners will maintain their properties to an acceptable physical standard and manage efficiently to keep costs within market rents.
The reality of where we are is a bit different. We're starting from a place where we have more than 20,000 fully assisted properties and an obligation to residents and owners of those properties - and to the taxpayers who footed the bill to construct and operate the properties over the years - to have a contract in place that's intended to assure both preservation and appropriate oversight. The PBC option - the Section 8 project-based contract that PETRA would authorize â€” is the new tool we need to help us where we are now. It's really a preservation tool for fully assisted properties. PHAs who use this tool will find HUD keeping a closer eye on them â€” for example, by requiring annual financial reporting in addition to physical inspections.
Can an owner convert to either form of assistance?
The PBC option is available to any converting owner. A PBC contract will be between an owner and HUD.
The option to convert to PBV assistance is available only for owners of small or partially assisted properties. Small properties are defined as having 25 or fewer units. Partially assisted properties are defined as those where not more than the greater of 25 units or 25 percent of the units are assisted. In areas where vouchers are difficult to use or with a poverty rate of 20 percent or less, or for properties serving elderly households or households eligible for comprehensive social services, up to and including 40 percent of units may be assisted in a converted property. A PBV contract is between an owner and a public housing agency.
Won't the PBV contract be subject to pro-ration?
PETRA contains language to protect against the proration of funding for properties assisted with a PBV contract. The language specifies that payments due under PBV contracts take priority in the event of insufficient appropriations.
Rent Setting, Contract Terms
How will contract rents be set for converting properties?
Rents will be market-based.
Asking rents will be capped at the comparable market rent for similar unassisted properties in the area, up to 110 percent of the applicable area rental, unless HUD approves a market rent above this cap.
A below-market rent would be permitted for a property that is physically and financially sustainable at such lower rent; HUD could use this authority if the competitive process for properties to be selected for conversion does not prevent "windfall" rents.
Rents for units that are exempt from local rent control would have to be reasonable in comparison with other exempt units.
For properties that are not sustainable at the comparable market rent and meet HUD-established criteria for preservation-worthiness, HUD could approve an exception rent. Exception rents would be strictly capped at the higher of 110 percent of the applicable area rental or 120 percent of the comparable market rent. Before approving an exception rent, HUD would have to consider whether a PHA (or other owner) could use unexpended HUD funding in lieu of an above-market rent to meet the property's needs. HUD may also require owners to seek other capital or assess how to reduce operating expenses before approving above-market rents to support debt.
How does conversion relate to "Asset Management"? Will it change how PHAs manage their properties?
For the past five years, PHAs have been transitioning to asset management, with a focus on project-based budgeting, accounting, management, etc. Any property that converts under PETRA will complete the transition to "asset management" by virtue of the fact that the owner of the property will enter into a property-based contract. In other words, not only will the owner budget and manage and operate and account for the property on an asset basis, but it will receive subsidy funding on an asset basis. This environment is better for the owner, because the subsidy will no longer be based on formula, and it is also better for HUD, because HUD will no longer have to create regulatory controls on specific cost centers. PHAs will have the ability and the responsibility to manage their converted properties as local conditions demand.
Does PETRA propose any changes to the administration of waiting lists?
Owners of properties assisted under PBC or PBV contracts would be permitted to maintain site-based waiting lists, subject to compliance with civil rights, fair housing, and other requirements. Waiting lists in place prior to conversion would continue to apply post-conversion.
Owners of more than one property or a public housing agency administering rental assistance could maintain a single waiting list or site-based waiting lists for individual properties but would be required to disclose to each applicant all of the other options in the selection of a property in which to reside. Public housing agencies administering site-based waiting lists for more than one converted property would be required to assure that an applicant could apply to all site-based waiting lists from a single location.
Does PETRA require the one-for-one replacement of converted public housing units?
Yes, with two exceptions.
The first exception is a de minimis exception that provides agencies with the flexibility to reconfigure units, for example by combining efficiencies to create one-bedroom apartments or to provide community space. The de minimis exception is limited to 5 apartments or 5 percent of the apartments at a converting property, whichever is less.
The second exception is similar to language in our Choice Neighborhoods proposal. It would permit an owner to replace up to 50 percent of the apartments in a converting property with tenant-based vouchers, but only in areas where vouchers are easy to use, including in areas of low poverty. This option is available only for properties located in areas where there has been a relatively high vacancy rate, over time. Overall, we estimate that no more than 10 percent of units could be replaced with vouchers.
For all other converting units, if an owner proposes a reduction in the number of assisted apartments in a converting property, then the owner must provide a plan for the timely replacement of such apartments.
In complying with one-for-one, would owners have any flexibility?
If an owner proposes through conversion to reduce the number of assisted apartments in a particular property, then the owner has to come up with a plan for replacing those units. The replacement units can be on the same site, or off-site in the neighborhood or elsewhere in the metropolitan area. Off-site replacement housing has to meet locational criteria related to economic and other opportunities, and it cannot be located in an area of relative minority concentration or of extreme poverty.
PETRA incorporates a choice option for residents that want or need to move out of a converted property. Where will the vouchers come from?
The primary source of such voucher assistance would be turnover in the Housing Choice Voucher Program. About 11 percent of voucher households leave the program each year, making about 240,000 vouchers available for reissuance if Congress fully funds voucher renewals. HUD may also be able to provide a modest amount of funding for additional moving vouchers by reallocating voucher funding that agencies leave unspent above the level of allowable reserves, as proposed in the 2011 budget and in the Section 8 Voucher Reform Act (SEVRA). Reliance on turnover vouchers to provide moving vouchers means that a significant number of families can be provided this important new right at no additional cost. We expect this mechanism to be sufficient for the first several years of conversion under PETRA.
A PHA that administers vouchers in addition to public housing would be required, if one or more properties is selected for conversion, to make available not more than one-third of its turnover vouchers to support families exercising the Choice Option. This limitation would enable most turnover vouchers to serve applicants on voucher waiting lists. When tenants exercise their Choice Option, new families would be able to receive rental assistance by moving into the vacated units, so the total number of new households receiving HUD-funded rental assistance each year would not decrease as a result of extending a Choice Option to converted properties.
Under the PBV program, residents who want to move receive the next available voucher after one year. This policy encourages agencies to choose to project-base assistance only in properties in which tenants would want to continue to live, and helps give assisted tenants the same right to move at the end of their lease term as unassisted families. It makes sense to retain this policy for what is primarily a new development, mixed income program.
After substantial analysis of expected demand for moving vouchers and the limited supply at a time of constrained resources, we have concluded that it is not feasible to extend the existing PBV policy to all converted properties without unduly distorting voucher waiting lists and undermining the important role vouchers play in meeting diverse community needs.
As a result, the Choice Option for residents of properties assisted under PETRA would be more limited than for residents of properties that have project-based voucher contracts. Residents of properties converted under PETRA would have a two-year wait prior to becoming eligible to exercise choice. We believe that this policy will in addition deter applicants from accepting an available unit with an intention to leave as soon as possible, a concern that has been expressed by PHAs.
How will PETRA impact smaller public housing authorities?
PETRA will provide small PHAs with the same regulatory relief and capital for repairs and renovation as are available to all converting owners. If small agencies own "small" properties, then they also would be more likely to have the option to convert to the PBV option, which could essentially relieve them of all direct responsibility to comply with HUD reporting requirements. (The PHA administering the voucher contract would determine tenant rents and deal directly with HUD.)
Combined with the adoption of regulatory changes based on recommendations made by voucher program stakeholders, PETRA will facilitate the ability of voucher agencies to form voluntary consortia, which will increase administrative efficiency and reduce administrative burdens and costs for agencies, enhance housing choice, and expand access for voucher program participants to a broader range of neighborhoods.
Civil Money Penalties
Does PETRA allow HUD to bring civil money penalties against the executive director of a PHA or board members of a PHA?
No. HUD currently has the authority to bring civil money penalty (CMP) actions against a Public Housing Agency (PHA) that is an owner of property receiving project-based assistance under Section 8, pursuant to Section 29 of the National Housing Act (42 U.S.C. 1437z-1). The PETRA does not change this authority. Liability under Section 29 is limited to the ownership entity itself, and does not extend to a PHA's executive director or board members.