Ballard Spahr LLP: HUD Issues Guidance on Demolition and Disposition of Public Housing

Ballard Spahr LLP: HUD Issues Guidance on Demolition and Disposition of Public Housing

By Amy M. McLain, Sharifa A. Anderson and Joy C. O'Brien

The U.S. Department of Housing and Urban Development has released guidance on the requirements for HUD approval of the demolition and disposition of public housing under Section 18 of the U.S. Housing Act of 1937 and its implementing regulations.

Published on February 2, 2012, Notice PIH 2012-7 provides guidance on important aspects of the application and approval process, including the need for a final determination of environmental reviews prior to approval of demolition and/or disposition; the criteria for justifying the demolition and/or disposition of public housing; and the use restrictions imposed on former public housing disposed of for less than fair market value.

HUD announced in the notice that it will now require an environmental review to be completed pursuant to 24 CFR Part 50 or Part 58 prior to submission of an application. Applicants will be required to show either that (1) the demolition and/or disposition action is environmentally acceptable under Part 50, (2) HUD has approved a Request for Release of Funds following completion of an environmental review by a Responsible Entity under Part 58, or (3) a Responsible Entity has determined that the project or activity is exempt under Part 58 because it falls under a categorical exemption and no environmental laws are triggered.

Given the long lead time often associated with the environmental review process, HUD's requirement that the environmental review be fully completed prior to the submission of a demolition and/or disposition application poses potential timing considerations and hurdles that may stymie redevelopment efforts.

In a disposition application, Housing Authorities must certify that the proposed disposition is consistent with the 1937 Act and the HA's Plan. PIH Notice 2012-7 cautions that HUD will not approve a disposition application if the supporting certification is based on insufficient public housing capital and/or operating funds given the availability of alternative resources to operate, maintain, or reposition public housing units.

HUD suggests that such alternative resources include the Rental Assistance Demonstration (RAD) program, Choice Neighborhood grants, public housing mixed-finance rehabilitation, Capital Fund Financing Program, excess Operating Fund reserves, and voluntary conversion under Section 22 of the 1937 Act. Through this language in PIH Notice 2012-7, HUD appears to be signaling that it will no longer consider applications from HAs that have sought to convert public housing to project-based Section 8 assistance through a Section 18 disposition on the basis that the Section 8 subsidy is necessary to provide adequate assistance to operate the units effectively. HAs with plans to undertake this type of disposition will now likely need to reevaluate such plans in an effort to ascertain which, if any, of the sources cited in PIH Notice 2012-7 and in what configuration  provide the alternative resources necessary to operate, maintain, or reposition the HA's public housing units.

Similarly, HUD cautions that applications based on the physical obsolescence of the project will not be approved unless they are supported by evidence in accordance with 24 CFR section 970.15 and demonstrate that no reasonable program of modification is cost-effective to return the project to its useful life. HUD clarifies that in determining physical obsolescence based on the cost-effectiveness of rehabilitation, HAs must develop cost estimates based on specific criteria and safe harbors enumerated in PIH Notice 2012-7.

In doing so, HUD has effectively tightened the requirements for justifying physical obsolescence. HAs must now provide a detailed description of the project's physical obsolescence, including a description of necessary work and any other factors that have reduced the marketability, usefulness, or management of the project. Given this guidance concerning obsolescence as a justification for demolition and HUD's emphasis on alternatives, some HAs will be required to adopt new approaches when analyzing the best options to return distressed public housing to quality low-income housing. In some cases, demolition and/or disposition may still be the preferred approach, but PIH Notice 2012-7 encourages careful justification of such an approach and full consideration of the alternatives.

PIH Notice 2012-7 also imposes additional conditions on a disposition for less than fair market value upon a showing of a commensurate public benefit as otherwise permitted by 24 CFR 970.19(a). While HUD has suggested previously in presentations and informal communications a public policy preference for imposing a long-term use restriction on property disposed for less than fair market value, PIH Notice 2012-7 explains that HUD expects a 30-year use restriction to be recorded against property to ensure the commensurate public benefit remains in place. Such a use restriction goes beyond the statute and the promulgated regulations, extending the reach of HUD public policy objectives.

PIH Notice 2012-7 also reminds HAs of the proper use of disposition proceeds. HAs may use gross proceeds to pay the reasonable costs of disposition and relocation as approved by HUD. As required by Section 18 of the U.S. Housing Act of 1937, any remaining net proceeds must first be used to retire outstanding obligations unless waived by HUD, with any remaining balance used for (1) the provision of low-income housing (i.e., public housing or Section 8 housing) or to benefit the residents of the HA, or (2) leveraging amounts for securing on-site commercial enterprises in public housing developments that serve the needs of the residents.

Finally, PIH Notice 2012-7 reiterates other noteworthy items required by the regulations at 24 CFR part 970 that HAs must address before their application will be processed. Upon determining that disposition and/or demolition is the best approach, HAs may submit applications to HUD's Special Application Center (SAC) for review and processing. SAC will review and make final determinations on applications. HAs should be aware that they may not begin any activities related to proposed demolition or disposition, including resident relocation, prior to receiving written HUD approval.

Ballard Spahr's attorneys can assist HAs in identifying the best alternatives for distressed public housing stock. For more information and advice, contact Amy M. McClain at mcclaina@ballardspahr.com or 410.528.5592, Joy C. O'Brien at obrienjc@ballardspahr.com or 215.864.8856, or Sharifa A. Anderson at andersonsa@ballardspahr.com or 410.528.5529.


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