The Opt-Out Epidemic

Since 1965, the federal government has supported the production of low-income rental housing primarily by giving subsidies to private owners of multifamily housing. These subsidy programs provide affordable housing to more than two million American families, most of whom have incomes below $15,000 per year.

The U.S. Department of Housing and Urban Development (HUD) administers two types of housing subsidy programs: subsidized mortgage and rental assistance. The primary subsidized mortgage program is Section 236. The main rental assistance program is project-based Section 8. Some developments have both types of subsidies.

• Section 236 originally provided owners with insured loans and subsidized their interest rates to as low as 1 percent. These benefits were provided in exchange for a commitment from the owners to rent only to eligible low-income tenants and charge only HUD-approved rents. The Section 236 program is no longer offering new mortgages, but buildings already in the program keep their subsidies.
• Project-based Section 8 subsidies pay the difference between a set "project rent" for the building and the tenants' rent contributions, which are set at 30 percent of their incomes. These subsidies can be provided for some or all units in a development. (Tenant-based Section 8, on the other hand, involves vouchers that tenants use to pay rent in an apartment of their choosing.)

The "expiring use" problem arises because the affordability of housing units receiving these subsidies is not permanently assured. The restrictions on rent levels, tenant eligibility, and overall operations last only for a specific time period. After 20 years, owners of most buildings with HUD-subsidized mortgages are allowed to convert to market-rate at any time by a prepayment of the mortgage loan. Developments with a project-based Section 8 contract have a restricted use only during the specific term of that contract, which is usually between five and 30 years, but most commonly 20.  When the Section 8 contract expires, the owner can convert to market-rate by refusing to renew the contract, which is called "opting out." The movement to keep these expiring use properties affordable is called "affordable housing preservation."

Affordability restrictions and contracts for many properties began to expire in the mid-1980s and will continue to do so throughout most of the next decade. However, the situation has become more serious since 1995, when Congress began to lose interest in supporting the subsidies, and defunded two of the main programs used to encourage preservation. At that time, owners of developments with HUD-subsidized mortgages were authorized to prepay their loans with few restrictions.

In 1997, Congress passed the "Mark to Market" bill, which established a general framework for renewing expiring subsidy contracts. While it covered all buildings with expiring contracts, its primary focus was to permit the reduction of rents and subsidies in developments with "above-market" rents. As originally written, it also permitted-but did not require-HUD to provide increased rents and subsidies for developments carrying "below-market" rents. In 1999, Congress required HUD to do so. This tool is called "Mark Up to Market."

Owners still have the option to reject any such offer from HUD, however, and convert to market-rate. In areas whose real estate markets boomed during the 1990s, many developments are at risk of conversion to market-rate use because owners know they can obtain higher returns or because they prefer the flexibility of lesser-regulated market-rate operation. Thousands of units have already been converted.

Tenants and advocates can play an important role in determining the choices an owner of an expiring use building makes, and in ensuring tenant protection if conversion proceeds.

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