2-15. BUDGET-BASED RENT ADJUSTMENT REQUESTS

An owner may prepare a budget-based adjustment request in connection with certain MAHRA contract renewal options and annual rent adjustments.

• A. Follow the requirements of Chapter 7 of HUD Handbook 4350.1, Multifamily Asset Management and Project Servicing, as modified below.

  1. Paragraph 7-30. P. of HUD Handbook 4350.1 does not apply. For Section 8 projects, the budget will no longer include a 2 percent contingency reserve for projects owned by nonprofits and those projects once owned by nonprofits but which have been sold to limited dividend partnerships.

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2. Projects with 100 percent Section 8 must include a vacancy loss rate of 3 percent in the budget unless as part of a refinancing, the lender requires a different vacancy rate. Exceptions to the policy are:

   • a. Projects with 50 or fewer (which includes both assisted and unassisted units) units, 20 percent or more of which are assisted with Section 8, must include a vacancy loss rate of 5 percent in the budget;

   • b. Projects where the assisted units account for 20 percent or less of the total units, no matter the total number of units in the project, must use a vacancy loss rate of 7 percent in the budget.

   • c. Projects where the assisted units account for between 21 and 99 percent of the total units and have more than 50 units, must use a vacancy loss rate of 5 percent in the budget.

• B.

• Section 22-16 of Chapter 22 of HUD Handbook 4350.1, will not apply.

The budget must reflect the project’s current debt service and debt service coverage requirement. The maximum debt service coverage ratio allowed in the budget is 1.2. In the context of a refinancing transaction and a renewal of the Section 8 contract to preserve the project, “current debt service” is that which will take effect when the new loan closes. If the debt service associated with the refinancing changes before the contract renewal, HUD retains the right to revise the budget.

Note: Any amount designated in the budget for debt service coverage may be drawn upon by the owner at year’s end to pay allowable annual distributions, or deferred Developer Fee (from surplus cash, using the required form of Residual Receipts Note (form HUD-91710M, Residual Receipts Note for Nonprofit Borrowers) or Promissory Note)). All remaining surplus cash must be deposited in the Residual Receipts account. If there is no Residual Receipts account in place, this requirement does not apply.

Note: See the note after Section 6-3. A.2.d. for information on how to treat debt service savings on 202 projects that have been refinanced.

• C. Projects with low-income housing tax credits may include in their budgets only the following fees and expenses for operating a tax credit project, including payment of the equity syndicator’s asset management fees; state allocating agency’s compliance and asset monitoring fees; mandatory interest payments that do not exceed one percent due on subordinate debt provided by a governmental lender; and deferred developer’s fees, plus interest accrued at the applicable federal rate, which may be deferred for no more than 12 years. The deferred developer fee and interest payments on government loans can only be paid from surplus cash.

• D. Owners may request a zero-dollar budget-based rent adjustment by marking the appropriate box on the “ Amend Rents Auto OCAF- Part A (HUD - 9626) or Part B (HUD - 9627 ). Owners do not need to submit a budget when the appropriate box on the “Amend Rents” form is checked.

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• E. For projects that have not previously prepared and submitted a budget-based rent increase, only the first request must include Attachment 5 (HUD-9635), Projects Preparing a Budget-Based Rent Increase, of this Guide.

• F. Owners of projects with an Option Four contract must submit a RCS when requesting an annual budget-based rent adjustment. This requirement does not apply at renewal. Owners requesting a zero budget-based rent adjustment do not have to submit a RCS. Owners of Section 515/8 projects who are required to submit budgets to Rural Housing do not have to submit a RCS if the rents resulting from the budget-based rent adjustment request do not exceed rents the project would have received based on the OCAF adjustment for that year.

• G. Owners submitting a budget-based rent adjustment request must comply with the notification requirements of 24 CFR Part 245 Subpart D.