Appendix to Part 972 - Methodology of Comparing Cost of Public Housing With the Cost of Tenant-Based Assistance
24:4.1.3.1.18.2.25.15.10 :
Appendix to Part 972 - Methodology of Comparing Cost of Public
Housing With the Cost of Tenant-Based Assistance I. Public
Housing-Net Present Value
The costs used for public housing shall be those necessary to
produce a viable development for its projected useful life. The
estimated cost for the continued operation of the development as
public housing shall be calculated as the sum of total operating
cost, modernization cost, and costs to address accrual needs. Costs
will be calculated at the property level on an annual basis
covering a period of 30 years (with options for 20 or 40 years).
All costs expected to occur in future years will be discounted,
using an OMB-specified real discount rate provided on the OMB Web
site at http://www.whitehouse.gov/OMB/Budget, for each year
after the initial year. The sum of the discounted values for each
year (net present value) for public housing will then be compared
to the net present value of the stream of costs associated with
housing vouchers.
Applicable information on discount rates may be found in
Appendix C of OMB Circular A-94, “Guidelines and Discount Rates for
Benefit Cost Analysis of Federal Programs,” which is updated
annually, and may be found on OMB's Web site at
http://www.whitehouse.gov/OMB. All cost adjustments
conducted pursuant to this cost methodology must be performed using
the real discount rates provided on the OMB Web site at
http://www.whitehouse.gov/OMB/Budget. HUD will also provide
information on current rates, along with guidance and instructions
for completing the cost comparisons on the HUD Homepage
(http://www.hud.gov). The Homepage will also include a
downloadable spreadsheet calculator that HUD has developed to
assist PHAs in completing the assessments. The spreadsheet
calculator is designed to walk housing agencies through the
calculations and comparisons laid out in the appendix and allows
housing agencies to enter relevant data for their PHA and the
development being assessed. Results, including net present values,
are generated based on these housing agency data.
A. Operating Costs
1. Any proposed revitalization or modernization plan must
indicate how unusually high current operating expenses
(e.g., security, supportive services, maintenance, tenant,
and PHA-paid 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 or modernized development, by relating those
operating costs to the expected occupancy rate, tenant composition,
physical configuration, and management structure of the revitalized
or modernized 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
or modernized 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 (P.I.L.O.T.) or some other comparable payment, and including
utilities and utility allowances) shall be expressed as total
operating costs per year. For example, if a development will have
375 units occupied by households and will have $112,500 monthly
non-utility costs (including pro-rated overhead costs and
appropriate P.I.L.O.T.) and $37,500 monthly utility costs paid by
the PHA, and $18,750 in monthly utility allowances that are
deducted from tenant rental payments to the PHA because tenants
paid some utility bills directly to the utility company, then the
development's monthly operating cost is $168,750 (or $450 per unit
per month) and its annual operating cost would be $5,400 ($450
times 12). Operating costs are assumed to begin in the initial year
of the 30-year (or alternative period) calculation and will be
incurred in each year thereafter.
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 or
modernized 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 or modernized development are plausible, when
the projected initial year per-unit operating cost of the renovated
development is lower than the current per unit cost by more than 10
percent, then the plan should detail how the revitalized
development will achieve this 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 20 percent, then the
development-based method will be used to determine projected costs.
The current costs will be divided by the sum of all occupied units
and vacant units fully funded under the Operating Fund Program plus
20 percent of all units not fully funded under the Operating Fund
Program. For instance, if the total monthly operating costs of the
current development are $168,750 and it has 325 occupied units and
50 vacant units not fully funded under the Operating Fund Program
(or a 13 percent overall vacancy rate), then the $2,250,000 is
divided by 335 - 325 plus 20 percent of 50 - to give a per unit
figure of $504 per unit month. By this example, the current costs
per occupied unit are at least 10 percent higher (12 percent in
this example) 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 20 percent or higher, then the PHA-wide method
will be used to determine projected costs. First, the current per
unit cost of the entire PHA will be computed, with total costs
divided by the sum of all occupied units and vacant units fully
funded under the Operating Fund Program plus 20 percent of all
vacant units not fully funded under the Operating Fund Program. For
example, if the PHA's operating cost is $18 million, and the PHA
has 4,000 units, of which 3,875 are occupied and 125 are vacant and
not fully funded under the Operating Fund Program, then the PHA's
vacancy adjusted operating cost is $385 per unit per month -
$18,000,000 divided by the 3,825 (the sum of 3,800 occupied units
and 20 percent of 125 vacant units) divided by 12 months. Second,
this amount will be multiplied by the ratio of the bedroom
adjustment factor of the development to the bedroom adjustment
factor of the PHA. 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, consider a development with 375
occupied units that had the following under an ACC contract: 200
two-bedroom units, 150 three-bedroom units, and 25 four-bedroom
units. In that example, the bedroom adjustment factor would be
1.127 - 200 times 1.0, plus 150 times 1.25, plus 25 times 1.4 with
the sum divided by 375. Where necessary, HUD field offices will
arrange for assistance in the calculation of the bedroom adjustment
factors of the PHA and its affected developments.
c. As an example of estimating development operating costs from
PHA-wide operating costs, suppose that the PHA had a total monthly
operating cost per unit of $385 and a bedroom adjustment factor of
.928, and suppose that the development had a bedroom adjustment
factor of 1.127. Then, the development's estimated current monthly
operating cost per occupied unit would be $467 - or $385 times
1.214 (the ratio of 1.127 to .928). By this example, the
development's current operating costs of $467 per unit per month
are not more than 10 percent higher (3.8 percent in this example)
than the projected costs of $450 per unit per month and no
additional justification of the cost reduction would be
required.
B. Modernization
Under both the required and voluntary conversion programs, PHAs
prepare modernization or capital repair estimates in accordance
with the physical needs of the specific properties proposed for
conversion. There are three key assumptions that guide how PHAs
prepare modernization estimates that affect remaining useful life
and determine whether the 20-, 30-, or discretionary 40-year
remaining useful life evaluation period are used for the cost-test.
When calculating public housing revitalization costs for a
property, PHAs will use a 30-year period if the level of
modernization addresses all accumulated backlog needs and the
planned redesign ensures long-term viability. For modernization
equivalent to new construction or when the renovations restore a
property to as-new physical conditions, a 40-year remaining useful
life test is used. When light or moderate rehabilitation that does
not address all accumulated backlog is undertaken, but it is
compliant with the International Existing Building Codes (ICC) or
Public Housing Modernization Standards in the absence of a local
rehabilitation code, the 20-year remaining useful life evaluation
period must be used.
Except for some voluntary conversion situations as explained in
paragraph E below, the cost of modernization is, at a minimum, the
initial revitalization cost to meet viability standards. In the
absence of a local code, PHAs may refer to the Public Housing
Modernization Standards Handbook (Handbook 7485.2) or the
International Existing Building Codes (ICC) 2003 Edition. To
justify a 40-year amortization cycle that increases the useful life
period and time over which modernization costs are amortized, PHAs
must demonstrate that the proposed modernization meets the
applicable physical viability standards, but must also cover
accumulated backlog and redesign that achieves as-new physical
conditions to ensure long-term viability. To be a plausible
estimate, modernization costs shall be justified by a newly created
property-based needs assessment (a life-cycle physical needs
assessments prepared in accordance with a PHA's Capital Fund annual
or 5-year action plan and shall be able to be reconciled with
standardized measures, such as components of the PHAs physical
inspection and chronic vacancy due to physical condition and
design. Modernization costs may be assumed to occur during years
one through four, consistent with the level of work proposed and
the PHA's proposed modernization schedule. For example, if the
initial modernization outlay (excluding demolition costs) to meet
viability standards is $21,000,000 for 375 units, a PHA might incur
costs in three equal increments of $7,000,000 in years two, three,
and four (based on the PHA's phased modernization plan). In
comparing the net present value of public housing to voucher costs
for required conversion, a 30-year amortization period will
normally be used, except when revitalization would bring the
property to as-new condition and a 40-year amortization would be
justified. On the other hand, when the modernization falls short of
meeting accumulated backlog and long-term redesign needs, only a
20-year amortization period might be justified.
C. Accrual
Accrual projections estimate the ongoing replacement repair
needs for public housing properties and building structures and
systems required to maintain the physical viability of a property
throughout its useful life as the lifecycle of building structures
and systems expire. The cost of accrual (i.e., replacement needs)
will be estimated with an algorithm that meets all ongoing capital
needs based on systems that have predictable lifecycles. The
algorithm starts with the area index of housing construction costs
(HCC) that HUD publishes as a component of its TDC index series.
Subtracted from this HCC figure is half the estimated modernization
per unit, with a coefficient of .025 multiplied by the result to
provide an annual accrual figure per unit. For example, suppose
that the development after modernization will remain a walkup
structure containing 200 two-bedroom, 150 three-bedroom, and 25
four-bedroom occupied units, and if HUD's HCC limit for the area is
$66,700 for two-bedroom walkup structures, $93,000 for
three-bedroom walkup structures, and $108,400 for four-bedroom
walkup structures. Then the unit-weighted HCC cost is $80,000 per
unit and .75 of that figure is $60,000 per unit. Then, if the per
unit cost of the modernization is $56,000, the estimated annual
cost of accrual per occupied unit is $1,300. This is the result of
multiplying .025 times $52,000 (the weighted HCC of $80,000) minus
$28,000 (half the per-unit modernization cost of $56,000). The
first year of total accrual for the development is $487,500 ($1,300
times 375 units) and should be assumed to begin in the year after
modernization is complete. Accrual - like operating cost - is an
annual expense and will occur in each year over the amortized
period. Because the method assumes full physical renewal each year,
this accrual method when combined with a modernization that meets
past backlog and redesign needs justifies a 30- or 40-year
amortization period, because the property is refreshed each year to
as-new or almost as-new condition.
D. Residual Value (Voluntary Conversion Only)
Under the voluntary conversion program, PHAs are required to
prepare market appraisals based on the “as-is” and
post-rehabilitation condition of properties, assuming the buildings
are operated as public or assisted, unassisted, or market-rate
housing. Section 972.218 requires PHAs to describe the future use
for a property proposed for conversion and to describe the means
and timetable to complete these activities. HUD will permit a PHA
to enter the appraised market value of a property into the
cost-test in Years 1 through 5 when a PHA anticipates selling a
property or receiving income generated from the sale or lease of a
property.
As a separate line item to be added to total public costs as a
foregone opportunity cost, a PHA shall include in the voluntary
cost-test calculations the appraised market or residual value (or
net sales proceeds) from the sale or lease of a property that is to
be voluntarily converted to tenant-based voucher assistance. The
PHA must hire an appraiser to estimate the market value of the
property using the comparable sale, tax-assessment, or
revenue-based appraisal methods. PHAs are advised to select one or
more of these appraisal methods to accurately determine the actual
or potential market value of a property, particularly the
comparable sales or revenue-based methods. The market or residual
value is to be determined by calculating the estimated market value
for the property based on the appraisal, minus any costs required
for demolition and remediation. The residual value must be
incorporated into the cost-test instead of the actual market value
only when any demolition, site remediation, and clearance costs
that are necessary are covered by the selling PHA. However, if the
sum of the estimated per unit cost of demolition and remediation
exceeds 10 percent of the average Total Development Cost (TDC) for
the units, the lower of the PHA estimate or a figure based on 10
percent of TDC must be used. Suppose the estimated remediation and
demolition costs necessary for conversion sale are $7,000 per unit.
Also, suppose the TDC limits are $115,000 for a two-bedroom unit,
$161,000 for a three-bedroom unit, and $184,000 for a four-bedroom
unit. Then the average TDC of a development with 200 two-bedroom
units, 150 three-bedroom units, and 25 four-bedroom units is
$138,000 (200 times $115,000, plus 150 times $161,000, plus 25
times $184,000, the sum divided by 375) and 10 percent of TDC is
$13,800. In this example, the estimated $7,000 per unit costs for
demolition and remediation is less than 10 percent of TDC for the
development, and the PHA estimate of $7,000 is used. If estimated
expenses had exceeded 10 percent of TDC ($13,800 in this example),
demolition and remediation expenses must be capped at the lower
amount.
E. Accumulated Discounted Cost: Public Housing
The overall cost for continuing to operate the development as
public housing is the sum of the discounted values of the yearly
stream of costs up for the amortization period, which can range
from 20 to 30 to 40 years, depending on the extent of modernization
relative to the current physical and redesign needs of the
development. In calculating net present value for required
conversion, the sum of all costs in each future year is discounted
back to the current year using the OMB-specified real discount
rate. For voluntary conversion, the discount rate is applied
forward as a direct inflation factor. To assist PHAs in completing
the net present value comparison and to ensure consistency in the
calculations, HUD has developed a spreadsheet calculator that is
available for downloading from the HUD Internet site. Using PHA
data and property specific inputs (to be entered by the housing
agency), the spreadsheet will discount costs as described above and
will generate net present values for amortization periods of 20,
30, and 40 years.
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 average of recent movers in the local area; plus
the administrative fee for providing such vouchers; plus $1,000 per
unit (or a higher amount allowed by HUD) for relocation assistance
costs, including counseling. However, if the sum of the estimated
per unit cost of demolition, remediation, and relocation exceeds 10
percent of the average Total Development Cost (TDC) for the units,
the lower of the PHA estimate or a figure based on 10 percent of
TDC must be used.
For example, if the development has 200 occupied two-bedroom
units, 150 occupied three-bedroom units, and 25 occupied
four-bedroom units, and if the monthly payment standard for voucher
units occupied by recent movers is $550 for two-bedroom units, $650
for three-bedroom units, and $750 for four-bedroom units, the
unit-weighted monthly payment standard is $603.33. If the
administrative fee comes to $46 per unit, then the monthly per unit
operating voucher costs are $649.33, which rounds to an annual
total of $2,922,000 for 375 occupied units of the same bedroom size
as those being demolished in public housing. To these operating
voucher costs, a first-year relocation is added on the voucher
side. For per-unit relocation costs of $1,000 per unit for
relocation, then $375,000 for 375 units is placed on the voucher
cost side of the first year.
Accumulated Discounted Cost: Vouchers
The overall cost for vouchers is the sum of the discounted
values of the yearly stream of costs up for the amortization
period, which can range from 20 to 30 to 40 years, depending on the
extent of modernization relative to the current physical and
redesign needs of the development. The amortization period chosen
is the one that was appropriate for discounting public housing
costs. In calculating net present value for required conversion,
the sum of all costs in each future year is discounted back to the
current year using the OMB-specified real discount rate. For
voluntary conversion, the discount rate is applied forward as a
direct inflation factor.
To assist PHAs in completing the net present value comparison
and to ensure consistency in the calculations, HUD has developed a
spreadsheet calculator that will be available for downloading from
the HUD Internet site.
III. Results of the Example
With the hypothetical data used in the examples, under an
amortization period of 30 years, the discounted public housing
costs under required conversion sums to $69,633,225, and the
discounted voucher cost under required conversions totals
$60,438,698. The ratio is 1.15, which means that public housing is
15 percent more costly than vouchers. With this amortization and
this data, the PHA would be required to convert the development
under the requirements of subpart A of this part, except in a
situation where a PHA can demonstrate a distressed property that
has failed the cost-test can be redeveloped by meeting each of the
four factors that compose the long-term physical viability test to
avoid removal from the inventory. With the same data, but a 40-year
amortization period, public housing is still 11 percent costlier
than vouchers, and with a 20-year amortization, public housing is
25 percent costlier than vouchers. In voluntary conversion, with
the same hypothetical data, but a slightly different methodology
(use of residual value as a public housing cost, inflating forward
the discount numbers), the ratio of public housing costs to voucher
costs would be 1.16 for the 20-year amortization period, 1.03 for
the 30-year amortization period, and .97 for the 20-year
amortization period. Thus, in voluntary conversion, the appropriate
amortization period would decide whether public housing is more
costly or is slightly more costly, or less than vouchers. Under a
20-year amortization assumption and possibly under a 30-year
amortization period, the PHA would have the option of preparing a
conversion plan for the development under subpart B of this part.
Different sets of data would yield different conclusions for
required and voluntary conversion determinations.
[71 FR 14336, Mar. 21, 2006]