Appendix to Part 971 - Methodology of Comparing Cost of Public Housing With Cost of Tenant-Based Assistance
24:4.1.3.1.17.0.5.8.9 :
Appendix to Part 971 - Methodology of Comparing Cost of Public
Housing With Cost of Tenant-Based Assistance I. Public Housing
The costs used for public housing shall be those necessary to
produce a revitalized development as described in the next
paragraph. These costs, including estimated operating costs,
modernization costs and costs to address accrual needs must be used
to develop a per unit monthly cost of continuing the development as
public housing. That per unit monthly cost of public housing must
be compared to the per unit monthly Section 8 cost. The estimated
cost of the continued operation and modernization as public housing
shall be calculated as the sum of total operating, modernization,
and accrual costs, expressed on a monthly per occupied unit basis.
The costs shall be expressed in current dollar terms for the period
for which the most recent Section 8 costs are available.
A. Operating Costs
1. The proposed revitalization plan must indicate how unusually
high current operating expenses (e.g, security, supportive
services, maintenance, utilities) will be reduced as a result of
post-revitalization changes in occupancy, density and building
configuration, income mix and management. The plan must make a
realistic projection of overall operating costs per occupied unit
in the revitalized development, by relating those operating costs
to the expected occupancy rate, tenant composition, physical
configuration and management structure of the revitalized
development. The projected costs should also address the comparable
costs of buildings or developments whose siting, configuration, and
tenant mix is similar to that of the revitalized public housing
development.
2. The development's operating cost (including all overhead
costs pro-rated to the development - including a Payment in Lieu of
Taxes (PILOT) or some other comparable payment, and including
utilities and utility allowances) shall be expressed as total
operating costs per month, divided by the number of units occupied
by households. For example, if a development will have 1,000 units
occupied by households and will have $300,000 monthly in
non-utility costs (including pro-rated overhead costs and
appropriate P.I.L.O.T.) and $100,000 monthly in utility costs paid
by the authority and $50,000 monthly in utility allowances that are
deducted from tenant rental payments to the authority because
tenants paid some utility bills directly to the utility company,
then the development's monthly operating cost per occupied unit is
$450 - the sum of $300 per unit in non-utility costs, $100 per unit
in direct utility costs, and $50 per unit in utility allowance
costs.
3. In justifying the operating cost estimates as realistic, the
plan should link the cost estimates to its assumptions about the
level and rate of occupancy, the per-unit funding of modernization,
any physical reconfiguration that will result from modernization,
any planned changes in the surrounding neighborhood and security
costs. The plan should also show whether developments or buildings
in viable condition in similar neighborhoods have achieved the
income mix and occupancy rate projected for the revitalized
development. The plan should also show how the operating costs of
the similar developments or buildings compare to the operating
costs projected for the development.
4. In addition to presenting evidence that the operating costs
of the revitalized development are plausible, when the per-unit
operating cost of the renovated development is more than ten
percent lower than the current per-unit operating cost of the
development, then the plan should detail how the revitalized
development will achieve its reduction in costs. To determine the
extent to which projected operating costs are lower than current
operating costs, the current per-unit operating costs of the
development will be estimated as follows:
a. If the development has reliable operating costs and if the
overall vacancy rate is less than twenty percent, then these costs
will be divided by the sum of all occupied units and vacant units
fully funded under PFS plus fifty percent of all units not fully
funded under PFS. For instance, if the total monthly operating
costs of the current development are $6.6 million and it has 1,000
occupied units and 200 vacant units not fully funded under PFS (or
a 17 percent overall vacancy rate), then the $6.6 million is
divided by 1100 - 1000 plus 50 percent of 200 - to give a per unit
figure of $600 per unit month. By this example, the current costs
of $600 per occupied unit are at least ten percent higher than the
projected costs per occupied unit of $450 for the revitalized
development, and the reduction in costs would have to be
detailed.
b. If the development currently lacks reliable cost data or has
a vacancy rate of twenty percent or higher, then its current per
unit costs will be estimated as follows. First, the per unit cost
of the entire authority will be computed, with total costs divided
by the sum of all occupied units and vacant units fully funded
under PFS plus fifty percent of all vacant units not fully funded
under PFS. Second, this amount will be multiplied by the ratio of
the bedroom adjustment factor of the development to the bedroom
adjustment factor of the Housing Authority. The bedroom adjustment
factor, which is based on national rent averages for units grouped
by the number of bedrooms and which has been used by HUD to adjust
for costs of units when the number of bedrooms vary, assigns to
each unit the following factors: .70 for 0-bedroom units, .85 for
1-bedroom units, 1.0 for 2-bedroom units, 1.25 for 3-bedroom units,
1.40 for 4-bedroom units, 1.61 for 5-bedroom units, and 1.82 for 6
or more bedroom units. The bedroom adjustment factor is the
unit-weighted average of the distribution. For instance, if the
development with one thousand occupied units had in occupancy 500
two-bedroom units and 500 three-bedroom units, then its bedroom
adjustment factor would be 1.125 - 500 times 1.0 plus 500 times
1.25, the sum divided by 1,000. Where necessary, HUD field offices
will arrange for assistance in the calculation of the bedroom
adjustment factors of the Housing Authority and its affected
developments.
c. As an example of estimating development operating costs from
PHA operating costs, suppose that the Housing Authority had a total
monthly operating cost per unit of $500 and a bedroom adjustment
factor of .90, and suppose that the development had a bedroom
adjustment factor of 1.125. Then, the development's estimated
current monthly operating cost per occupied unit would be $625 - or
$500 times 1.25 (the ratio of 1.125 to .90).
B. Modernization
The cost of modernization is the initial revitalization cost to
meet viability standards, that cost amortized over twenty years
(which is equivalent to fifteen years at a three percent annual
real capital cost for the initial outlay). Expressed in monthly
terms, the modernization cost is divided by 180 (or 15 years times
12 months). Thus, if the initial modernization outlay to meet
viability standards is $60 million for 1,000 units, then the
per-unit outlay is $60,000 and the amortized modernization cost is
$333 per unit per month (or $60,000 divided by 180). However, when
revitalization would be equivalent to new construction and the PHA
thus is permitted to amortize the proposed cost over thirty years
(which is equivalent to twenty-two and one-half years at a three
percent annual real capital cost to the initial outlay), the
modernization cost will be divided by 270, the product of 22.5 and
12, to give a cost per unit month of $222.
C. Accrual
The monthly per occupied unit cost of accrual (i.e., replacement
needs) will be estimated by using the latest published HUD unit
total development cost limits for the area and applying them to the
development's structure type and bedroom distribution after
modernization, then subtracting from that figure half the per-unit
cost of modernization, then multiplying that figure by .02
(representing a fifty year replacement cycle), and dividing this
product by 12 to get a monthly cost. For example, if the
development will remain a walkup structure containing five hundred
two-bedroom occupied and five hundred three-bedroom occupied units,
if HUD's Total Development Cost limit for the area is $70,000 for
two-bedroom walkup structures and $92,000 for three-bedroom walkup
structures, and if the per unit cost of modernization is $60,000,
then the estimated monthly cost of accrual per occupied unit is
$85. This is the result of multiplying the value of $51,000 - the
cost guideline value of $81,000 minus half the modernization value
of $60,000 - by .02 and then dividing by 12.
D. Overall Cost
The overall current cost for continuing the development as
public housing is the sum of its monthly post-revitalization
operating cost estimates, its monthly modernization cost per
occupied unit, and its estimated monthly accrual cost per occupied
unit. For example, if the operating cost per occupied unit month is
$450 and the amortized modernization cost is $333 and the accrual
cost is $85, the overall monthly cost per occupied unit is
$868.
II. Tenant-Based Assistance
The estimated cost of providing tenant-based assistance under
Section 8 for all households in occupancy shall be calculated as
the unit-weighted averaging of the monthly Fair Market Rents for
units of the applicable bedroom size; plus the administrative fee
applicable to newly funded Section 8 rental assistance during the
year used for calculating public housing operating costs (e.g., the
administrative fee for units funded from 10/1/95 through 9/30/96 is
based on column C of the January 24, 1995 Federal Register, at 60
FR 4764, and the administrative fee for units funded from 10/1/96
through 9/30/97 is based on column B of the March 12, 1997 Federal
Register, at 62 FR 11526); plus the amortized cost of demolishing
the occupied public housing units, where the cost per unit is not
to exceed ten percent of the TDC prior to amortization. For
example, if the development has five hundred occupied two-bedroom
units and five hundred occupied three-bedroom units and if the Fair
Market Rent in the area is $600 for two bedroom units and is $800
for three bedroom units and if the administrative fee comes to $46
per unit, and if the cost of demolishing 1000 occupied units is $5
million, then the per unit monthly cost of tenant based assistance
is $774 ($700 for the unit-weighted average of Fair Market Rents,
or 500 times $600 plus 500 times $800 with the sum divided by
1,000; plus $46 for the administrative fee; plus $28 for the
amortized cost of demolition and tenant relocation (including any
necessary counseling), or $5000 per unit divided by 180 in this
example). This Section 8 cost would then be compared to the cost of
revitalized public housing development - in the example of this
section, the revitalized public housing cost of $868 monthly per
occupied unit would exceed the Section 8 cost of $774 monthly per
occupied unit by 12 percent. The PHA would have to prepare a
conversion plan for the property.
III. Detailing the Section-8 Cost Comparison: A Summary Table
The Section 8 cost comparison methods are summarized, using the
example provided in this section III.
A. Key Data, Development: The revitalized development has 1000
occupied units. All of the units are in walkup buildings. The 1000
occupied units will consist of 500 two-bedroom units and 500
three-bedroom units. The total current operating costs attributable
to the development are $300,000 per month in non-utility costs,
$100,000 in utility costs paid by the PHA, and $50,000 in utility
allowance expenses for utilities paid directly by the tenants to
the utility company. Also, the modernization cost for
revitalization is $60,000,000, or $60,000 per occupied unit. This
will provide standards for viability but not standards for new
construction. The cost of demolition and relocation of the 1000
occupied units is $5 million, or $5000 per unit, based on recent
experience.
B. Key Data, Area: The unit total development cost limit is
$70,000 for two-bedroom walkups and $92,000 for three-bedroom
walkups. The two-bedroom Fair Market Rent is $600 and the
three-bedroom Fair Market Rent is $800. The applicable monthly
administrative fee amount, in column B of the March 12, 1997
Federal Register Notice, at 62 FR 11526, is $46.
C. Preliminary Computation of the Per-Unit Average Total
Development Cost of the Development: This results from applying the
location's unit total development cost by structure type and number
of bedrooms to the occupied units of the development. In this
example, five hundred units are valued at $70,000 and five hundred
units are valued at $92,000 and the unit-weighted average is
$81,000.
D. Current Per Unit Monthly Occupied Costs of Public
Housing:
1. Operating Cost - $450 (total monthly costs divided by
occupied units: in this example, the sum of $300,000 and $100,000
and $50,000 - divided by 1,000 units).
2. Amortized Modernization Cost - $333 ($60,000 per unit divided
by 180 for standards less than those of new construction).
3. Estimated Accrual Cost - $85 (the per-unit average total
development cost minus half of the modernization cost per unit,
times .02 divided by 12 months: in this example, $51,000 times .02
and then divided by 12).
4. Total per unit public housing costs - $868.
E. Current per unit monthly occupied costs of section 8:
1. Unit-weighted Fair Market Rents - $700 (the unit-weighted
average of the Fair Market Rents of occupied bedrooms: in this
example, 500 times $600 plus 500 times $800, divided by 1000).
2. Administrative Fee - $46.
3. Amortized Demolition and Relocation Cost - $28 ($5000 per
unit divided by 180).
4. Total per unit section 8 costs - $774.
F. Result: In this example, because revitalized public housing
costs exceed current Section 8 costs, a conversion plan for the
property would be required.