NYAHMA Testimony

Chairman Dodd, Ranking Member Schumer  (depending on who is there)

My name is Hector Pinero I am Senior Vice President of Related Management Company.  We have our headquarters in New York City and own and manage approximately 26,000 units of multifamily housing in 13 states, from New York to California. 

I appear today on behalf of National Leased Housing, the National Multi Housing Council and the National Apartment Association.

I will use my few minutes to focus on HUD’s budget as it relates to the Section 8 project-based assistance program and the recent funding shortfalls that have raised serious concerns about the ability of the Federal Government to honor its contracts.

In our opinion, the Section 8 subsidy mechanism is the most effective housing subsidy ever devised by Congress.  It is an elastic subsidy that can reach the very poorest families and keep their rent burden proportionately the same as the rent burden of families with more income.  Related Management’s Section 8 project-based inventory totals 12,070 units in 69 developments. 

For Section 8 to continue to be an effective program, HUD must comply with its contractual promise to housing providers to make timely monthly assistance payments. In recent months, these payments have been as many as 2 to 9 months in arrears. 

The housing assistance payments cover the difference between tenant rent contributions, generally set at 30 percent of a tenant’s adjusted income,and the HUD-approved Section 8 rents for the property. 

The tenant rent contribution generally pays for only a small portion of the costs of running an apartment community.  Without assistance payments from HUD a project cannot continue to operate and serve its residents.

While HUD has been late sporadically in making payments over the past several years, it was not until the summer of 2007 that a major disruption occurred.  From June through September, late payments were widespread over most parts of the country. 

In the case of our portfolio,  we billed HUD in June of 2007 for $9.8 million in assistance payments for the month of July.  Almost one-third of our bill, or $3.1 million, was not paid by July 31, and about 20 percent or $2 million remained unpaid until November. 

One of our projects, in San Diego, received no funds for the period of July through November, for a total of $875,000.  No doubt many other owners have been hit harder than us, but any materially late payment at any time is indefensible. 

Owners do what they can to cope during these periods of nonpayment, such as drawing funds from reserves if they exist, borrowing funds, delaying payments to vendors, and making personal contributions.          

However, not all properties have the ability to make ends meet when HUD fails to make timely payments, resulting in notices of default, inability to pay operating expenses, and deferred maintenance.

Late HAP payments not only affect the operations of a property, but also make difficult the preservation of these aging projects through sales and rehabilitation, often to nonprofit or other preservation purchasers that commit to long affordability periods, usually with proceeds from the low-income housing tax credit. 

Purchasers, lenders, and tax credit investors have now been put on alert that the government may not perform under its contracts, and they will act accordingly to protect their interests, assuming they continue to participate at all. 

We have attached to our testimony a list of 19 adverse consequences of delayed or insufficient HAP funding.

HUD has responded to the budget shortfall in the latter part of FY07 and FY08 by entering into renewal contracts that no longer even purport to make a commitment for one year of funding,     but rather obligate HUD for only a period of a few months,  with the promise to extend the short period’ for an indeterminate further period, when and if sufficient appropriations become available.

Our review of the HUD FY09 budget proposal indicates that HUD plans to continue this short term, or incremental funding approach, which does not assuage the concerns of the industry.

What can this Committee do to help rectify the damage done to the Section 8 portfolio? 

First, it can exercise close oversight over the process HUD uses to make Section 8 assistance payments, as well as how budgetary needs are calculated.  The Secretary should be directed to use a portion of the appropriated working capital funds for this purpose. 

Second, legislation should be enacted to:

• impose a penalty on HUD when its payments are more than thirty days late;
• remove any requirements that owners receive HUD permission in advance to use project reserves to pay their mortgages and employees when HAP payments are late; and
• Require HUD to notify owners when late payments are anticipated. 

Third, the Committee should urge that sufficient appropriations be provided for fiscal year 2009 to avert the use of a succession of short term funding obligations by HUD including supporting any emergency funding in FY08 to achieve that goal.

The industry stands ready to work with this Committee on these and other important housing issues and appreciates your support.

Thank you for allowing me to air our views.