UPDATE 6.0: Getting ready for the long haul — New HUD FAQs focus on RAD, HUD transactions, and coronavirus (COVID-19) management

May 28, 2020

Affordable Housing Alert

Author(s): Harry J. Kelly, Meghan C. Altidor, Deborah VanAmerongen

We address the newest COVID-19 guidance contained in HUD’s most recent FAQs, issued on May 21, 2020, as well as additional guidance concerning electronic documents and signatures.

Since March, shortly after COVID-19 became the focus of all our attention, HUD’s Office of Multifamily Housing has issued guidance to help the housing community deal with COVID-19. The guidance focuses on management issues, transactional matters, and broader questions about HUD programs and reverberations from federal stimulus and relief laws, such as the CARES Act. The pace of new FAQs has slowed in recent weeks, but new guidance issued late last week indicates that, now that housing providers have taken emergency measures to deal with the initial onslaught of the virus, it is time to consider steps to prepare for long-term impacts of COVID-19. This alert addresses the newest guidance contained in HUD’s most recent FAQs, issued on May 21, 2020 (“May 21 FAQs”) as well as additional guidance concerning electronic documents and signatures that is particularly timely now.

RAD Guidance

The new FAQ guidance contains a number of items of note for RAD developers. First, HUD is providing additional time for execution of tenant leases in light of social distancing procedures. An owner may elect that the RAD HAP effective date be the first day of the third full month after closing (instead of the first or second month), permitting the owner additional time to maximize the number of leases executed and units included on the HAP contract. Second, the FAQs provide guidance for RAD transactions subject to a Part 50 Environmental Review when consultations with State Historic Preservation Offices, Tribal Historic Preservation Offices, and federally recognized tribes are required. If these offices are closed, then the consultation timeframes will be considered paused during such closures. HUD notes that it will be monitoring this situation to avoid adverse effects and counsels that it should be consulted for urgent matters. For RAD conversions that require a Phase I assessment, HUD advises that it can accept an environmental site assessment (ESA) with an exterior inspection only if access to the interior of buildings or units is not available (with certain alternative means of viewing the interior such as phone interviews and photos or publically available sources). In certain cases in which a project is already in HUD’s portfolio, HUD may even accept an ESA without a physical site visit if travel to the site is restricted due to shelter-in-place or quarantine orders. Finally, the HUD FAQs provide flexibility for lead-based paint, asbsestos and radon testing, and reporting when access to units is not available, such as deferral of testing or creation of an environmental contingency fund in the sources and uses to continue the processing of the RAD submission during the inaccessible period.

Rent Comparability Studies (RCS), Project Capital Needs Assessments (PCNAs), Residual Receipts Offsets (RRO), and electronic documents

Owners and managers of project-based Section 8 housing are now navigating almost the fourth month of HAP contract renewals, vouchering, leasing and re-leasing, and HAP property transfers. The new HUD FAQ guidance gives some updates on these subjects as well as updates on FHA PCNAs. HUD also separately issued a Housing Notice applying to HAP properties, and others, allowing (but not requiring) electronic signatures.

RCS Update #1

HUD issued an update to a question regarding what to do where an owner’s RCS has triggered a need for a HUD-commissioned RCS. HUD’s last stance on the subject was suspension of HUD RCSs in areas under a state or nationally declared emergency or where public health officials have imposed limited travel. The most recent update to this question states that PBCAs and HUD will continue to review the owner’s previously submitted RCS pursuant to guidance in Chapter 9 of the Section 8 Renewal Guide and that if field staff is unable to procure third-party RCSs due to COVID-19, HUD will develop an alternative mechanism to respond to the owner’s RCS submission. We will track the issuance of this alternative mechanism.

RCS Update #2

HUD answers a new question regarding a HAP contract’s fifth-year comparability rent adjustment where an RCS cannot be obtained. HUD states that it will continue to pay the current rent amounts after the fifth-year anniversary date and owners will be required to obtain and submit RCSs as soon as emergency conditions allow. New rent amounts, based on the approved RCS, with any adjustments by HUD, will be made retroactive to the fifth-year anniversary date. This supplements the previously answered question of what an owner or agent should do if a property’s HAP contract is coming up for renewal and an RCS study is required but cannot be obtained. The current position from HUD is to approve all renewals for Option One, Option Two, Option Three (at initial renewal only), and Option 4 (where the owners seeks to establish eligibility based on rents being at or below market) as short-term renewals with a 12-month term at current rents.

Residual Receipts Offsets

HUD answers whether Section 8 HAP owners may temporarily stop reducing vouchers to offset Residual Receipts (RR) as a precaution against COVID-19 expenses. If you have a property with an RR account, HUD will temporarily permit suspension of RR HAP offsets, in certain circumstances. All PRACS may suspend offsets for RR through December 31, 2020. Owners of HAP properties must receive approval in advance to suspend offset payments. Asset Management Division Directors are authorized to suspend such offsets through December 31, 2020, for properties where COVID-9 expenses are anticipated to exceed available resources.

PCNA Updates

HUD also added a question responding to FHA-insured borrowers that having an upcoming 10- year anniversary from final closing that requires an updated PCNA. Multifamily is allowing the postponement of the 10-year PCNA updates until September 30, 2020, for reports due between March 15 and September 30, 2020.

Electronic signatures

The Office of Multifamily Housing also issued a new Notice regarding electronic signature, transmission, and storage of documents and forms required by HUD’s Office of Asset Management and Portfolio Oversight in the Office of Multifamily Housing Programs. The Notice also permits partners to electronically transmit and electronically store files, but must do so in compliance with federal, state, and local laws. Owners and managers choosing to adopt the terms of the Notice must still provide applicants and tenants the option to use wet (original) signatures and paper documents, if requested. The Notice applies to project-based Section 8 programs and Section 202 and Section 811 programs, Rent Supplement, Section 236, RAP and Section 221(d)(3) properties. This guidance does not apply to Public and Indian Housing program, FHA loan programs that are otherwise unassisted, nor to the HOME program. Documents impacted are (a) documents transmitted among owners, agents, HUD, contract administrators, and other service providers; (b) documents submitted by and provided to applicants or tenants; (c) documents submitted to and from third-party verifiers to owners and agents; and (d) documents used for other HUD multifamily housing business purposes. This guidance should include Form HUD 9624s, HAP assignments and assumptions, and HUD consents to collateral HAP assignments. There is a note that state or local laws or entities may require the use of wet signatures for HUD 50059s, HUD-9887s, and leases and addenda. More information regarding adopting the terms of this Notice will be contained in a subsequent alert or blog post.

COVID-19 management issues

In the absence of other qualified expertise at the federal level, providers of both market rate and affordable housing have looked to HUD’s FAQ guidance over the last several months to establish at least de facto “best practices” for minimizing the spread of the virus at multifamily housing properties. Initially, HUD largely referred readers to publications of the Centers for Disease Control (“CDC”) or to state and local public health agencies for detailed guidance. After all, HUD’s expertise is housing, not epidemiology, and these federal, state, and local agencies had far more knowledge about minimizing the spread of infectious diseases than HUD. In recent iterations of its FAQs, however, HUD has spoken more clearly and definitively about how to deal with the virus at the property level, perhaps reflecting HUD’s own growing experience over the last several months, including the following topics:

Notice concerning tenants who are COVID-19-positive

One of the most difficult questions faced by housing providers is what to do if they become aware that a resident has tested positive for COVID-19. Typically, under common law, owners have a duty to notify tenants about known hazards. It wasn’t clear, however, if the presence of a virus-positive resident constituted a “known hazard” that had to be disclosed. In past guidance, HUD signaled that owners should follow CDC guidance on the subject, which was less than definitive on the subject. In the latest FAQs, HUD tilts more firmly toward disclosing this information, saying that it “suggests that owners and agents immediately notify the local health department and communicate with staff, residents, volunteers, and visitors about potential COVID-19 exposure.” May 21 FAQs at 4 (emphasis added). Elsewhere, HUD advises that housing providers that receive information about a positive case should “communicate the possible COVID-19 exposure to all residents and workers, volunteers, and visitors,” by placing signs in common areas, including exits and entrances, and by delivering letters to residents’ doors—a pretty direct way of getting a message across to tenants. Id. This guidance should eliminate any remaining doubts that housing providers have about providing guidance to residents about the presence of the virus in their communities. In addition, the new FAQs urges housing providers to follow CDC guidance about minimizing face-to-face contact between staff members and residents with confirmed or suspected cases of COVID-19. HUD advises that “[r]esidents are not required to notify administrators if they have or may have a positive case of COVID-19.” Id.

While disclosing the presence of COVID-19 at a property may encourage tenants to take additional precautions that ultimately will protect all tenants, disclosure of virus-positive individuals may make residents reluctant to disclose positive tests. HUD advises that this should be done “in coordination with local health officials” and that housing providers “should also consult with local and state health and privacy laws, before making any disclosure,” which is sage advice, even though at least some public health agencies have warned that housing providers should not disclose this information to other residents, to protect the privacy of persons who are virus-positive. Id.

These privacy concerns are not hypothetical—public health agencies no doubt fear that if virus-positive persons are identified, they will be subject to ostracism and worse, making it unlikely that they will cooperate with urgent measures to corral the virus. For that reason, HUD also warns that “owners and agents must maintain confidentiality as required by the Americans with Disabilities Act and the Privacy Act” and assures that while housing providers “may provide notification of positive COVID-19 cases . . .they must ensure the notification does not disclose any names, apartment numbers, and other personally-identifiable information to residents, workers, volunteers[,] and visitors.” Id. (emphasis original). Among other things, housing providers “should attempt to counter potential stigma and discrimination.” Id. Thus, the latest HUD FAQs appear to take the stand that housing providers can protect individual privacy while providing vital guidance about the presence of the virus at a property to staff, residents, and others that will allow them to take active measures to protect themselves and thus blunt the spread of the virus.

Don’t include late fees incurred during the eviction moratorium in post-moratorium collections

For a relatively simple provision, the 120-day eviction moratorium included in § 4024 of the CARES Act has provoked a lot of questions and second-guessing. In addition to preventing owners from initiating eviction proceedings during the period of the moratorium, the CARES Act also made it unlawful to “charge fees, penalties, or other charges to the tenant related to the nonpayment of rent.” CARES Act, § 4024(b)(2). While the act makes it unlawful to charge such fees during the 120-day eviction moratorium, some housing providers have asked whether it is permissible to charge late fees after the moratorium ends on July 25 for fees that otherwise would have accrued during the moratorium period. HUD’s answer in a word: No. According to HUD, its “interpretation . . . is that fees and charges that could not be assessed during the eviction moratorium should not accrue and should not be charged after the moratorium ends.” Id. at 14. For extra clarification, while HUD warns that a housing provider “may only charge fees and penalties during the eviction moratorium if the charge is wholly unrelated to a tenant’s nonpayment of rent,” it also confirms that “rents not paid during the moratorium” and “fees assessed prior to the eviction moratorium . . . may be collected.” Id.

Charging for internet services is not allowed

HUD has added a provision in the FAQ guidance regarding broadband internet access, a timely addition given the importance of internet access to families across the United States during the COVID-19 pandemic. Many owners and managers have wisely adopted more active measures to communicate with residents about virus-management issues, including using internet-based media to spread news and information. Some housing providers have even considered purchasing “smart speakers” to allow them to communicate more effectively with residents. While these novel approaches make communication quicker, HUD confirms that internet services are not an allowable expense for properties receiving HUD project-based rental assistance but does encourage property owners and agents to make their properties internet-ready, to participate in the Neighborhood Networks Program,[1] and reminds owners that low-income tenants may be eligible for low-cost internet services. HUD provides tenants and owners a suggestion to contact local internet service providers or visit www.connecthomeusa.org.

  1. The Neighborhood Networks Initiative was created in 1995 as a community-based initiative at HUD. It encourages the development of resource and computer centers in privately owned HUD-assisted and/or-insured housing. The centers work to build self-reliance neighborhoods by serving lower-income families and seniors where they live. Any HUD-insured and/or assisted property can request the use of project funds to develop or support the ongoing operations of a Neighborhood Networks center. The application starts with development of a Neighborhood Networks Business Plan for approval by HUD. Indicators that a property would benefit from a Neighborhood Networks center include, amongst other things, isolation from social services or development programs needed by the residents to become self-sufficient. This could be an interesting option for property owners with “new regulation” limited distribution HAP contracts.
    [Back to reference]

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

Back to top