HUD recently issued a proposed rule to revise requirements applicable to demolition and disposition of public housing by public housing authorities (PHAs) and modify the rules for converting public housing to Section 8 assistance. The proposed rule also reflects significant changes to HUD’s view of the treatment of funds derived from the sale of public housing land.

The proposed rule seeks to enact some processes that have been informally implemented by HUD through notices or other directives, but also contains a number of new provisions. These provisions would:

• Tightly regulate use of disposition proceeds and treat them similarly to federal funds
• Require new HUD approvals for certain actions including rooftop and telecommunications leases and licenses on public housing property
• Modify the justifications for disposition
• Augment tenant consultation and relocation requirements
• Add a new alternative to disposition that would enable PHAs to remove public housing restrictions on a property for which the PHA retains ownership

HUD’s proposed new approach to the treatment of disposition proceeds has the potential to significantly affect public housing authority financings and development plans.

Significant Changes to Disposition Requirements

The proposed rule suggests a number of modifications to current requirements:

• To dispose of a property for less than fair market value (FMV), a PHA would have to provide specific information about the “commensurate public benefit” that would be obtained. HUD also defines what constitutes a benefit to include low-income rental units to be provided for not less than 30 years, low-income homeownership opportunities, non-dwelling structures/facilities to serve low-income families, and other HUD-approved benefits. The proposed rule would codify the current HUD practice of requiring recorded use restrictions or similar arrangements when dispositions are made at less than FMV. Any “commensurate public benefit” use must commence within two years of the completed disposition, unless extended by HUD.
• Third-party leases or licenses given by PHAs for rooftop leases, telecommunications, garden space, or similar arrangements would have to be approved by HUD or be subject to the disposition regulations. Similarly, leases for one year or less of a project for purposes of showing site control for funding applications (e.g., tax credit applications) would also be subject to the disposition regulations unless approved by HUD.
• The justifications supporting disposition have been modified. Most noticeably, although PHAs could certify that the disposition would allow for development of other low-income housing that would be efficient or effective, the PHA would have to demonstrate that public housing or Section 8 project-based voucher replacement units would be provided for all displaced families and provide for HUD’s evaluation of a financing plan for such replacement units.
• The proposed rule would require completion of disposition within two years of the date of HUD approval unless HUD approved an extension.
• The proposed rule imposes significant restrictions on the use and expenditure of disposition proceeds. In addition to defining the types of permissible uses, the proposed rule would require PHAs to begin spending disposition proceeds within two years of the disposition approval and to complete such expenditures within four years. Disposition proceeds would take on the character and requirements of the use, meaning that proceeds used to modernize public housing would be subject to all applicable public housing requirements, and so forth. Most notably, HUD would apply environmental requirements, labor standards, and Section 3 requirements to use of proceeds. Proceeds would have to be kept in an account subject to HUD’s General Depository Agreement and/or an escrow agreement.
• HUD proposes provisions regarding the expenditure or recapture of operating and capital funds for demolition and disposition actions that would remove all public housing projects from a PHA’s inventory.

New Demolition Requirements

The changes to demolition requirements are not as significant, but some are notable:

• An exception to HUD approval is added for demolition of a project due to abrupt damage to a project incurred from an emergency, major disaster, or other event outside of the PHA’s control.
• The “de minimis” exception is further clarified and limited.

New Resident Protections

Regarding resident protections, the proposed rule:

• Increases the information to be provided in resident notices and requires relocation notice to occur at least 90 days prior to displacement, except in cases of imminent threat to health and safety
• Requires that displaced residents be relocated to areas that, taken together, are comparable to the residents’ current location in terms of access to public transportation, child care, employment, education, services, shopping, recreational, and other amenities.

New Disposition Alternative

The proposed rule highlights a rarely invoked provision of federal regulations that would enable a PHA to remove dwelling units, vacant land, or non-dwelling structures from its public housing stock. Under this alternative option, a PHA could apply to HUD to remove public housing restrictions following a separate application process from the standard disposition process. The PHA would retain ownership of the property, directly or through an instrumentality or entity it controls. The PHA would have to reimburse HUD for the federal government’s participation in the property, but good cause exceptions to the requirement would be available.

Projects removed from a PHA’s public housing portfolio under this option would likely be subject to use restrictions to ensure continued use for the purposes proposed in the PHA’s application. Applications for this alternative removal process would be subject to environmental review, resident and local government consultation requirements, and board approvals. PHAs would also have to sign a “civil rights certification” that confirm there are no outstanding fair housing charges, lawsuits by the U.S. Department of Justice, Civil Rights Act letters of finding, or similar violations.

Conversion of Public Housing to Section 8

The proposed rule would remove from the definition of “conversion” language that contemplated that conversions under 24 CFR Part 972 might involve a conversion of public housing to project-based Section 8 assistance. As such, the definition limits conversions to tenant-based assistance.

Comments on the proposed rule must be submitted to HUD by December 15, 2014. Ballard Spahr will continue to monitor developments regarding demolition, disposition, and conversion of public housing.