An Overview of the Four Types of Rental Adjustments for HAP Contracts

The Housing Assistance Payments (HAP) contract is a written agreement between a public housing agency (PHA) and the owner of a unit occupied by a Housing Choice Voucher program participant. The HAP contract must be in the form prescribed by HUD. Under the HAP contract, the PHA agrees to make housing assistance payments to the owner on behalf of a specific family leasing a specific unit.

Initially, contract rents, plus utility allowances, may not exceed the HUD determined so-called fair market rents for similarly situated units in newly constructed, substantially rehabilitated, or existing or moderately rehabilitated developments in the area, although, under special circumstances, HUD can approve initial contract rents (plus utility allowances) for particular assisted projects in an amount up to 120 percent of the applicable fair market rents. The fair market rents are published at least annually by HUD in the Federal Register.

Your site’s HAP contract will determine the rent adjustment method you should use. The following are the four methods used to adjust rents.

Operating Cost Adjustment Factor (OCAF) Rent Adjustments

The OCAF is a factor that’s established by HUD, and is applied to the existing contract rent (less the portion of the rent that is paid for debt service). OCAF values are determined by HUD annually and are published in the Federal Register. The most recent OCAFs were published in October and went into effect nationwide for sites having an anniversary date on or after Feb. 11, 2016.

HUD determines OCAFs based on nine categories of operating expenses at FHA-insured projects: wages, employee benefits, property taxes, insurance, supplies and equipment, fuel oil, electricity, natural gas, and water and sewer service. Although an OCAF rent increase doesn’t affect the resident’s portion of the rent, it increases the amount of assistance HUD will pay the site. To calculate the rent increase, HUD subtracts the per-unit debt service cost from the contract rent, then applies the OCAF for the state where the site is located.

Some HAP contracts are eligible for an Auto OCAF. The Auto OCAF Rent Increase process eliminates the requirement for the owner to calculate its own OCAF rent increase and submit an OCAF Worksheet in amend-rent years to obtain an OCAF rent increase. 

Annual Adjustment Factor (AAF) Rent Adjustments

AAFs, which are used to adjust contract rents for units assisted in certain Section 8 housing assistance payment programs during the initial term of the HAP contract, are developed by HUD on the basis of Consumer Price Index (CPI) data on changes in residential rent and utility costs, and data from Random Digit Dialing (RDD) rent-change surveys of the HUD regions. Eligibility is determined by your current HAP contract. If the Rent Adjustment section of your current contract refers to 24 CFR Part 886 or 888 or to Automatic Annual Adjustments, you will use the AAF to adjust your rents. Here are the three categories of programs that use AAFs:

• Section 8 New Construction, Substantial Rehabilitation, and Moderate Rehabilitation programs;
• Section 8 Loan Management and Property Disposition programs;
• Section 8 Project-Based Certificate program, which is essentially discontinued since the PBC program merged with the Housing Choice Voucher program in February 2016.

HUD publishes the AAFs annually in the Federal Register. These factors are applied at the anniversary of HAP contracts for which rents are to be adjusted using the AAF. HUD published the most recent AAFs on April 3, 2016.

HUD’s published AAFs are shown in two schedules, one for adjusting the rent of units where the highest-cost utility (usually heating) is included in the contract rent (termed “Highest Utility Included” in the tables) and the other for units where the tenant pays for the highest-cost utility (“Highest Utility Excluded”). Separate AAF schedules are published for a total of about 123 areas: (a) about 119 separate metropolitan areas, including counties that are currently designated as non-metropolitan, but are part of the metropolitan area defined in the local Bureau of Labor Statistics CPI survey; and (b) the four Census Regions for those metropolitan and non-metropolitan areas that are not covered by the local CPI surveys.

An AAF rent increase is effective for contracts commencing on the later of the annual contract anniversary date for which the adjustment is requested, or the first contract month beginning at least two months after the owner has submitted all required materials to the contract administrator (but no later than two months before the next annual contract anniversary date).

Budget Based Rent Increase (BBRI) Rent Adjustments

The BBRI is a way for sites to increase their rent levels to support property expenses. A BBRI request should be prepared in accordance with the requirements of HUD Handbook 4350.1, Chapter 7. At a minimum, a request for a BBRI must contain the following items:

• A cover letter summarizing the reasons for the increase, proposing an effective date, and describing the physical condition and any improvements budgeted for. It needs to identify any proposed changes in services, equipment, or charges, and reasons for those changes.
• A budget worksheet (Form HUD-92547-A) completed in accordance with Handbook 4350.1.
• A Justification Statement for changes in budgeted line item amounts that exceed last year’s audited figures by $500 or 5 percent and miscellaneous line items.
• A copy of notice to tenants, annotated to show where and how the notice was distributed (if applicable).
• An executed copy of the Owner’s Certification Regarding Purchasing Practices and Reasonableness of Expenses (Appendix 3 of 4350.1).
• An Energy Conservation Plan status report (if applicable), described in Chapter 12 of Handbook 4350.1.
• A signed request to increase reserve deposits or a statement that reserves are adequate (Appendix 6 of 4350.1).
• A utility allowance recommendation, if tenants receive a utility allowance.

Utility Allowance (UA) Adjustments

HUD provides utility allowances to sites receiving subsidy assistance where all or some utilities are paid directly by the residents. Utility allowances represent the owner’s best estimate of the average monthly utility cost of an energy-conscious resident based on an analysis. To determine the UA for the property, owners are required to perform a yearly analysis of their site’s utilities, at the time of the annual or special adjustments of contract rents. This applies to OCAF, AAF, and BBRI rent adjustments. The UA adjustment may result in an increase, decrease, or no change from the current UA and must be supported by an analysis. The annual rent adjustment will be withheld if the owner doesn’t submit the utility analysis with the rent adjustment submission. The regulations, at 24 CFR 245.405(a) and 245.410, require the owner to serve a 30-day notice to the tenants of a proposed decrease in the utility allowance.