[Federal Register Volume 79, Number 32 (Tuesday, February 18, 2014)]
[Notices]
[Pages 9260-9263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-03461]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5749-N-01]


Section 8 Housing Assistance Payments Program--Annual Adjustment 
Factors, Fiscal Year 2014

AGENCY: Office of Assistant Secretary for Policy Development and 
Research, HUD.

ACTION: Notice of Fiscal Year (FY) 2014 Annual Adjustment Factors 
(AAFs).

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SUMMARY: The United States Housing Act of 1937 requires that assistance 
contracts signed by owners participating in the Department's Section 8 
housing assistance payment programs provide annual adjustments to 
monthly rentals for units covered by the contracts. This notice 
announces FY 2014 AAFs for adjustment of contract rents on assistance 
contract anniversaries. The factors are based on a formula using 
residential rent and utility cost changes from the most recent annual 
Bureau of Labor Statistics Consumer Price Index (CPI) survey. Beginning 
with the FY 2014 Fair Market Rents and continuing with the FY 2014 
AAFs, the Puerto Rico CPI is used in place of the South Region CPI for 
all areas in Puerto Rico. These factors are applied at Housing 
Assistance Payment (HAP) contract anniversaries for those calendar 
months commencing after the effective date of this notice. A separate 
Federal Register Notice will be published at a later date that will 
identify the inflation factors that will be used to adjust tenant-based 
rental assistance funding for FY 2014.

DATES: Effective Date: February 18, 2014.

FOR FURTHER INFORMATION CONTACT: Contact Michael S. Dennis, Director, 
Housing Voucher Programs, Office of Public Housing and Voucher 
Programs, Office of Public and Indian Housing, 202-708-1380, for 
questions relating to the Project-Based Certificate and Moderate 
Rehabilitation programs (non-Single Room Occupancy); Ann Oliva, 
Director, Office of Special Needs Assistance Programs, Office of 
Community Planning and Development, 202-708-4300, for questions 
regarding the Single Room Occupancy (SRO) Moderate Rehabilitation 
program; Catherine Brennan, Director, Office of Housing Assistance and 
Grant Administration, Office of Housing, 202-708-3000, for questions 
relating to all other Section 8 programs; and Marie Lihn, Economist, 
Economic and Market Analysis Division, Office of Policy Development and 
Research, 202-402-5866, for technical information regarding the 
development of the schedules for specific areas or the methods used for 
calculating the AAFs. The mailing address for these individuals is: 
Department of Housing and Urban Development, 451 7th Street SW., 
Washington, DC 20410. Hearing- or speech-impaired persons may contact 
the Federal Information Relay Service at 800-877-8339 (TTY). (Other 
than the ``800'' TTY number, the above-listed telephone numbers are not 
toll free.)

SUPPLEMENTARY INFORMATION: Tables showing AAFs will be available 
electronically from the HUD data information page at http://www.huduser.org/portal/datasets/aaf.html/FY2014_tables.pdf.

I. Applying AAFs to Various Section 8 Programs

    AAFs established by this Notice are used to adjust contract rents 
for units assisted in certain Section 8 housing assistance payment 
programs during the initial (i.e., pre-renewal) term of the HAP 
contract and for all units in the Project-Based Certificate program. 
There are three categories of Section 8 programs that use the AAFs:
    Category 1: The Section 8 New Construction, Substantial 
Rehabilitation, and Moderate Rehabilitation programs;
    Category 2: The Section 8 Loan Management (LM) and Property 
Disposition (PD) programs; and
    Category 3: The Section 8 Project-Based Certificate (PBC) program.
    Each Section 8 program category uses the AAFs differently. The 
specific application of the AAFs is determined by the law, the HAP 
contract, and appropriate program regulations or requirements.
    AAFs are not used in the following cases:
    Renewal Rents. With the exception of the Project-Based Certificate 
program, AAFs are not used to determine renewal rents after expiration 
of the original

[[Page 9261]]

Section 8 HAP contract (either for projects where the Section 8 HAP 
contract is renewed under a restructuring plan adopted under 24 CFR 
part 401; or renewed without restructuring under 24 CFR part 402). In 
general, renewal rents are based on the applicable state-by-state 
operating cost adjustment factor (OCAF) published by HUD; the OCAF is 
applied to the previous year's contract rent minus debt service.
    Budget-based Rents. AAFs are not used for budget-based rent 
adjustments. For projects receiving Section 8 subsidies under the LM 
program (24 CFR part 886, subpart A) and for projects receiving Section 
8 subsidies under the PD program (24 CFR part 886, subpart C), contract 
rents are adjusted, at HUD's option, either by applying the AAFs or by 
budget-based adjustments in accordance with 24 CFR 886.112(b) and 24 
CFR 886.312(b). Budget-based adjustments are used for most Section 8/
202 projects.
    Tenant-based Certificate Program. In the past, AAFs were used to 
adjust the contract rent (including manufactured home space rentals) in 
both the tenant-based and project-based certificate programs. The 
tenant-based certificate program has been terminated and all tenancies 
in the tenant-based certificate program have been converted to the 
Housing Choice Voucher Program, which does not use AAFs to adjust 
rents. All tenancies remaining in the project-based certificate program 
continue to use AAFs to adjust contract rent for outstanding HAP 
contracts.
    Voucher Program. AAFs are not used to adjust rents in the Tenant-
Based or the Project-Based Voucher programs.

II. Adjustment Procedures

    This section of the notice provides a broad description of 
procedures for adjusting the contract rent. Technical details and 
requirements are described in HUD notices H 2002-10 (Section 8 New 
Construction and Substantial Rehabilitation, Loan Management, and 
Property Disposition) and PIH 97-57 (Moderate Rehabilitation and 
Project-Based Certificates).
    Because of statutory and structural distinctions among the various 
Section 8 programs, there are separate rent adjustment procedures for 
the three program categories:

Category 1: Section 8 New Construction, Substantial Rehabilitation, and 
Moderate Rehabilitation Programs

    In the Section 8 New Construction and Substantial Rehabilitation 
programs, the published AAF factor is applied to the pre-adjustment 
contract rent. In the Section 8 Moderate Rehabilitation program (both 
the regular program and the single room occupancy program), the 
published AAF is applied to the pre-adjustment base rent.
    For Category 1 programs, the Table 1 AAF factor is applied before 
determining comparability (rent reasonableness). Comparability applies 
if the pre-adjustment gross rent (pre-adjustment contract rent plus any 
allowance for tenant-paid utilities) is above the published Fair Market 
Rent (FMR).
    If the comparable rent level (plus any initial difference) is lower 
than the contract rent as adjusted by application of the Table 1 AAF, 
the comparable rent level (plus any initial difference) will be the new 
contract rent. However, the pre-adjustment contract rent will not be 
decreased by application of comparability.
    In all other cases (i.e., unless the contract rent is reduced by 
comparability):
     The Table 1 AAF is used for a unit occupied by a new 
family since the last annual contract anniversary.
     The Table 2 AAF is used for a unit occupied by the same 
family as at the time of the last annual contract anniversary.

Category 2: Section 8 Loan Management Program (24 CFR Part 886, Subpart 
A) and Property Disposition Program (24 CFR Part 886, Subpart C)

    At this time Category 2 programs are not subject to comparability. 
(Comparability will again apply if HUD establishes regulations for 
conducting comparability studies under 42 U.S.C. 1437f(c)(2)(C).)
    The applicable AAF is determined as follows:
     The Table 1 AAF is used for a unit occupied by a new 
family since the last annual contract anniversary.
     The Table 2 AAF is used for a unit occupied by the same 
family as at the time of the last annual contract anniversary.

Category 3: Section 8 Project-Based Certificate Program

    The following procedures are used to adjust contract rent for 
outstanding HAP contracts in the Section 8 PBC program:
     The Table 2 AAF is always used. The Table 1 AAF is not 
used.
     The Table 2 AAF is always applied before determining 
comparability (rent reasonableness).
     Comparability always applies. If the comparable rent level 
is lower than the rent to owner (contract rent) as adjusted by 
application of the Table 2 AAF, the comparable rent level will be the 
new rent to owner.
     The new rent to owner will not be reduced below the 
contract rent on the effective date of the HAP contract.

III. When To Use Reduced AAFs (From AAF Table 2)

    In accordance with Section 8(c)(2)(A) of the United States Housing 
Act of 1937 (42 U.S.C. 1437f(c)(2)(A)), the AAF is reduced by 0.01:
     For all tenancies assisted in the Section 8 Project-Based 
Certificate program.
     In other Section 8 programs, for a unit occupied by the 
same family at the time of the last annual rent adjustment (and where 
the rent is not reduced by application of comparability (rent 
reasonableness)).
    The law provides that:

    Except for assistance under the certificate program, for any 
unit occupied by the same family at the time of the last annual 
rental adjustment, where the assistance contract provides for the 
adjustment of the maximum monthly rent by applying an annual 
adjustment factor and where the rent for a unit is otherwise 
eligible for an adjustment based on the full amount of the factor, 
0.01 shall be subtracted from the amount of the factor, except that 
the factor shall not be reduced to less than 1.0. In the case of 
assistance under the certificate program, 0.01 shall be subtracted 
from the amount of the annual adjustment factor (except that the 
factor shall not be reduced to less than 1.0), and the adjusted rent 
shall not exceed the rent for a comparable unassisted unit of 
similar quality, type and age in the market area. 42 U.S.C. 
1437f(c)(2)(A).

Legislative history for this statutory provision states that ``the 
rationale [for lower AAFs for non-turnover units is] that operating 
costs are less if tenant turnover is less . . .'' (see Department of 
Veteran Affairs and Housing and Urban Development, and Independent 
Agencies Appropriations for 1995, Hearings Before a Subcommittee of the 
Committee on Appropriations 103d Cong., 2d Sess. 591 (1994)). The 
Congressional Record also states the following:

    Because the cost to owners of turnover-related vacancies, 
maintenance, and marketing are lower for long-term stable tenants, 
these tenants are typically charged less than recent movers in the 
unassisted market. Since HUD pays the full amount of any rent 
increases for assisted tenants in section 8 projects and under the 
Certificate program, HUD should expect to benefit from this `tenure 
discount.' Turnover is lower in assisted properties than in the 
unassisted market, so the effect of the current inconsistency with 
market-based rent increases is exacerbated. (140 Cong. Rec. 8659, 
8693 (1994)).

    To implement the law, HUD publishes two separate AAF Tables, Tables 
1 and 2. The difference between

[[Page 9262]]

Table 1 and Table 2 is that each AAF in Table 2 is 0.01 less than the 
corresponding AAF in Table 1. Where an AAF in Table 1 would otherwise 
be less than 1.0, it is set at 1.0, as required by statute; the 
corresponding AAF in Table 2 will also be set at 1.0, as required by 
statute.

IV. How To Find the AAF

    AAF Tables 1 and 2 are posted on the HUD User Web site at http://www.huduser.org/portal/datasets/aaf.html/FY2014_tables.pdf. There are 
two columns in each AAF table. The first column is used to adjust 
contract rent for rental units where the highest cost utility is 
included in the contract rent, i.e., where the owner pays for the 
highest cost utility. The second column is used where the highest cost 
utility is not included in the contract rent, i.e., where the tenant 
pays for the highest cost utility.
    The applicable AAF is selected as follows:
     Determine whether Table 1 or Table 2 is applicable. In 
Table 1 or Table 2, locate the AAF for the geographic area where the 
contract unit is located.
     Determine whether the highest cost utility is or is not 
included in contract rent for the contract unit.
     If highest cost utility is included, select the AAF from 
the column for ``Highest Cost Utility Included.'' If highest cost 
utility is not included, select the AAF from the column for ``Highest 
Cost Utility Excluded.''

V. Methodology

    AAFs are rent inflation factors. Two types of rent inflation 
factors are calculated for AAFs: Gross rent factors and shelter rent 
factors. The gross rent factor accounts for inflation in the cost of 
both the rent of the residence and the utilities used by the unit; the 
shelter rent factor accounts for the inflation in the rent of the 
residence, but does not reflect any change in the cost of utilities. 
The gross rent inflation factor is designated as ``Highest Cost Utility 
Included'' and the shelter rent inflation factor is designated as 
``Highest Cost Utility Excluded.''
    AAFs are calculated using CPI data on ``rent of primary residence'' 
and ``fuels and utilities.'' \1\ Beginning with these FY 2014 AAFs, the 
Puerto Rico CPI is used in place of the South Region CPI for all areas 
in Puerto Rico. The CPI inflation index for rent of primary residence 
measures the inflation of all surveyed units regardless of whether 
utilities are included in the rent of the unit or not. In other words, 
it measures the inflation of the ``contract rent'' which includes units 
with all utilities included in the rent, units with some utilities 
included in the rent, and units with no utilities included in the rent. 
In producing a gross rent inflation factor and a shelter rent inflation 
factor, HUD decomposes the contract rent CPI inflation factor into 
parts to represent the gross rent change and the shelter rent change. 
This is done by applying data from the Consumer Expenditure Survey 
(CEX) on the percentage of renters who pay for heat (a proxy for the 
percentage of renters who pay shelter rent) and also American Community 
Survey (ACS) data on the ratio of utilities to rents. As done with the 
FY 2014 Fair Market Rents, HUD is incorporating the Puerto Rico 
Community Survey into the calculation of the FY 2014 AAFs. The Puerto 
Rico Community Survey (PRCS) is used to determine the ratio of 
utilities to rents, resulting in area-specific AAFs for the first time 
for some metropolitan areas in Puerto Rico.\2\
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    \1\ CPI indexes CUUSA103SEHA and CUSR0000SAH2 respectively.
    \2\ The formulas used to produce these factors can be found in 
the Annual Adjustment Factors overview and in the FMR documentation 
at www.HUDUSER.org.
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Survey Data Used To Produce AAFs

    The rent and fuel and utilities inflation factors for large 
metropolitan areas and Census regions are based on changes in the rent 
of primary residence and fuels and utilities CPI indices from 2011 to 
2012. The CEX data used to decompose the contract rent inflation factor 
into gross rent and shelter rent inflation factors come from a special 
tabulation of 2011 CEX survey data produced for HUD for the purpose of 
computing AAFs. The utility-to-rent ratio used to produce AAFs comes 
from 2011 ACS median rent and utility costs.

Geographic Areas

    AAFs are produced for all Class A CPI cities (CPI cities with a 
population of 1.5 million or more), the four Census Regions, and Puerto 
Rico. The Class A CPIs are applied to core-based statistical areas 
(CBSAs), as defined by the Office of Management and Budget (OMB), 
according to how much of the CBSA is covered by the CPI city-survey. If 
more than 75 percent of the CBSA is covered by the CPI city-survey, the 
AAF that is based on that CPI survey is applied to the whole CBSA and 
to any HUD-defined metropolitan area, called the ``HUD Metro FMR Area'' 
(HMFA), within that CBSA. If the CBSA is not covered by a CPI city-
survey, the CBSA uses the relevant regional CPI factor. The Puerto Rico 
CPI covers the entire island rather than a defined city area. An ACS-
adjusted CPI is developed for all the CBSAs in Puerto Rico. Almost all 
U.S. non-metropolitan counties use regional CPI factors.\3\ For areas 
assigned the Census Region CPI factor, both metropolitan and non-
metropolitan areas receive the same factor.
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    \3\ There are four non-metropolitan counties that continue to 
use CPI city updates: Ashtabula County, OH, Henderson County, TX, 
Island County, WA, and Lenawee County, MI. BLS has not updated the 
geography underlying its survey for new OMB metropolitan area 
definitions and these counties, are no longer in metropolitan areas, 
but they are included as parts of CPI surveys because they meet the 
75 percent standard HUD imposes on survey coverage. These four 
counties are treated the same as metropolitan areas using CPI city 
data.
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    Each metropolitan area that uses a local CPI update factor is 
listed alphabetically in the tables and each HMFA is listed 
alphabetically within its respective CBSA. Each AAF applies to a 
specific geographic area and to units of all bedroom sizes. AAFs are 
provided:
     For separate metropolitan areas, including HMFAs and 
counties that are currently designated as non-metropolitan, but are 
part of the metropolitan area defined in the local CPI survey.
     For the four Census Regions (to be used for those 
metropolitan and non-metropolitan areas that are not covered by a CPI 
city-survey).
    AAFs use the same OMB metropolitan area definitions, as revised by 
HUD, that are used for the FY 2014 FMRs.

Area Definitions

    To make certain that they are using the correct AAFs, users should 
refer to the Area Definitions Table section at http://www.huduser.org/portal/datasets/aaf.html/FY2014_AreaDef.pdf. The Area Definitions 
Table lists CPI areas in alphabetical order by state, and the 
associated Census region is shown next to each state name. Areas whose 
AAFs are determined by local CPI surveys are listed first. All 
metropolitan areas with local CPI surveys have separate AAF schedules 
and are shown with their corresponding county definitions or as 
metropolitan counties. In the six New England states, the listings are 
for counties or parts of counties as defined by towns or cities. The 
remaining counties use the CPI for the Census Region and are not 
specifically listed in the Area Definitions Table at http://www.huduser.org/portal/datasets/aaf.html/FY2014_AreaDef.pdf.
    Puerto Rico uses its own AAFs calculated from the Puerto Rico CPI 
as adjusted by the PRCS and the Virgin Islands uses the South Region 
AAFs. All

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areas in Hawaii use the AAFs listed next to ``Hawaii'' in the Tables 
which are based on the CPI survey for the Honolulu metropolitan area. 
The Pacific Islands use the West Region AAFs.

    Dated: February 11, 2014.
Jean Lin Pao,
General Deputy Assistant Secretary, for Policy Development and 
Research.
[FR Doc. 2014-03461 Filed 2-14-14; 8:45 am]
BILLING CODE 4210-67-P