HUD Can Apply REAC Standards to Section 8 Project-Based Program

Facts: Owners of two multifamily housing sites had entered into 30-year housing assistance payment (HAP) contracts with HUD in the late 1970s. Under the HAP contracts, the owners were required to maintain and operate their units and related facilities so as to provide decent, safe, and sanitary housing. The contracts also provided HUD with inspection rights to ensure compliance.

On June 30, 1998, HUD published a proposed rule to establish uniform physical condition and inspection standards for certain HUD programs, including Section 8 project-based housing like the ones the owners maintain. After notice and comment, HUD issued another rule setting forth the administrative process by which HUD would notify owners of HUD's assessment of the physical condition of their multifamily housing sites. The products of the 1998 and 2000 rulemaking procedures are collectively referred to as the “REAC regulations.”

In 2003, several years after the REAC regulations took effect, and after several annual inspections of the owners' sites by HUD according to the REAC standards, the owners' sites failed their annual inspection. HUD agreed not to terminate the owners' HAP contracts as a result of these failing scores. Nevertheless, the owners sued HUD for applying REAC standards to their sites and attempting to terminate their HAP contracts. HUD asked the court to dismiss the case.

Ruling: A New York district court granted a judgment without a trial in HUD's favor.

Reasoning: The court ruled that HUD's application of REAC standards to the Section 8 project-based voucher program was not arbitrary. The rules were passed with proper notice and comment, meaning that they are eligible for deference from the courts.

To exemplify HUD's arbitrariness, the owners pointed to the fact that there are different inspection procedures for tenant-based housing, in which residents select their home and the assistance payments travel with them when they move, and project-based housing, where rental assistance is provided to residents who live in designated developments. There are two forms of housing evaluation, REAC and Housing Quality Standards (HQS). The REAC inspection standards address the major areas of HUD housing, such as the building exterior, the building systems, the dwelling units, and the common areas. HQS inspections, on the other hand, focus more on the individual units in which the assisted households live.

The court decided that HUD's explanation for the difference was adequate. Unlike Section 8 project-based assistance, HUD is continuously reviewing and approving new units in the Section 8 tenant-based assistance programs, and HUD has found that the HQS procedure is appropriate for that purpose. In light of this explanation, HUD's decision to continue with HQS inspections in tenant-based housing, at least temporarily, is not arbitrary, but is born of the unique continuous, unit-specific inspection demands of that program.

• Valentine Properties Associates v. HUD, April 2011