USDA Mismanagement Leads to Loss of Subsidy and Rent Increases for Tenants

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September 3, 2015; Des Moines Register

The Des Moines Register article, “Housing advocates: Vilsack should act on subsidy cuts,” casts an important light on an emerging problem for tenants in USDA Rental Development (RD) housing. Tenants in these developments are losing their Rental Assistance (RA) subsidies and facing rent increases because of a recent policy change: the “no re-renewal rule.” In 2014, at the request of USDA, Congress enacted a provision that owners who spend all of their Rental Assistance funds in less than 12 months, cannot renew their contracts until the next 12 month cycle begins. The provision was designed to save money, but leaves some owners, many of them nonprofits, in a lurch.

The Housing Assistance Council (HAC), an advocacy organization for rural development, reports: “USDA RD estimates that in FY15, 50 properties will run out of Rental Assistance subsidies money before their terms end, and that in early FY16, 700-800 projects will be affected. Owners can ask RD for the mitigation measures offered at the end of FY13, such as deferral of RD payments …but when those changes are not enough to cover operating costs RD staff reportedly are telling property owners they can request permission to raise rents.”

National Housing Law Project warns that rent increases would be illegal and threatens litigation. “Nationally, it is estimated that as many as 20,000 households will receive these notices, with 60 percent [of] them likely to be elderly households or households that include a person with a disability. They likely cannot pay the increased rents and are at risk of displacement or eviction. In fact, these rent increases are caused by the arbitrary manner in which RD has calculated the amount of RA subsidies that is awarded to each development. The rent increases are also illegal.”

Meanwhile tenants are receiving rent increase notices with little idea where to turn. A different Des Moines Register article warns that 145 tenants in 6 projects in Iowa are at risk of receiving rent increase notices. The Clarion News cites another case in southern Indiana where a community based nonprofit sponsor can’t just eat the costs of non renewal. “Although the agreement was renewed in February, Lincoln Hills Development Corp., which built the apartments in 1996 with a 50-year loan from Rural Development, received notice that its funding is about to be exhausted and it is not eligible for another renewal until next February.”

The Des Moines Register article describes a unique combination of Republican elected officials and housing advocates coalesing around this short term problem. Owners of USDA properties are worried too. The Nixon Peabody law firm which represents many housing providers receiving Federal Assistance calls this the “quiet rural housing crisis”. The quietness arises from the fact that the properties are small and far from major news outlets. “Quiet” also because USDA has not come up with solutions other than proposals to shift cost to tenants in the form of rent increases and shift blame to Congress. In the Register article a USDA spokesperson is quoted as saying: “What Congress did not do…was allow for shorter-term leases so that the USDA and property owners could plan better and fill gaps…”

Advocates and owners argue that the shortfall problem arises from the USDA funding formula that is based on a state average, which means that half of all the contracts will be underfunded, half overfunded. Richard Michael Price, an attorney at Nixon Peabody, says: “The issue is complicated by the fact that Rental Development is required by statute and regulation to fund RA properties on a budget basis, yet many Rental Development offices set rents on state formulas rather than actual budgets. Rental Development officially states that such state formulas don’t limit rents, but that appears to be adding to the confusion around renewing  Rental Assistance subsidies contracts.” The “no re-renewal rule” makes this situation into a crisis for tenants and owners.

In some states like Ohio there seems to be a stand off between nonprofit sponsors of USDA properties and their for profit partners. Local nonprofits are reluctant to pass along rent increases or evict their neighbors, while their for-profit partners have a fiduciary duty to their shareholders.

But wait! The problem could get worse in the coming months. Because of a Congressional budget impasse as soon as next week, USDA could find itself unable to fix the “no re-renewal rule” and constrained by the extension of FY2015 funding levels. In response, the Obama administration has asked that an “anomaly” be added to the Continuing Resolution in order to permit USDA to front load spending for Rental Assistance in order to cover the current shortfalls and head off shortfalls that will occur in FY 2016. But an “anomaly” which amounts to spending less money faster, is not a “solution”. Without an agreement between Congress and the Administration, proposed FY2016 appropriations for USDA will not be sufficient to renew all existing Rental Assistance subsidies contracts coming up for renewal in 2016.

If all this is not bad enough, USDA is steaming towards a much bigger “iceberg.” According to an unpublished communication from a USDA staff person, the agency is on track to lose 215,598 affordable housing units between 2014-2024 as current mortgages mature. Unlike maturing HUD mortgages, there’s no provision for Rental Assistance to continue after a USDA mortgage is paid off. Advocates have wondered aloud if some at USDA anticipate mortgage maturities to “solve” the problem of rising costs of Rental Assistance. A long article in the Daily Yonder outlines the decline of USDA housing programs over recent decades.

NPQ’s Rick Cohen wonders if the fact that Iowans are paying attention to this issue could mean that the issues will be magnified as the Presidential sweepstakes heats up. If candidates start getting questions about USDA ineptness in their small town visits, perhaps the need for sweeping changes at USDA will become a political issue.—Spencer Wells