HUD Finalizes Streamlined Management and Occupancy Review Scheduling

For high-scoring sites, MORs could be less … less frequent, that is.

Section 8 sites are subject to audits and inspections known as Management and Occupancy Reviews (MORs). A MOR provides an assessment of the day-to-day financial management of a property. It also assesses management’s ability to maintain a property in a decent, safe, and sanitary condition. HUD uses these reviews to monitor a site to ensure that the owner is complying with its Section 8 Housing Assistance Payment (HAP) contract requirements, management certification, and HUD rules and regulations. MORs ensure that HUD’s multifamily housing programs are administered as intended by identifying deficiencies to eliminate fraud, waste, and mismanagement.

HUD recently introduced a new risk-based management and occupancy review schedule. For some time, HUD has advised owners that it wished to streamline the MOR process and reduce the number of reviews conducted. The final rule implementing this new schedule has come about seven years after HUD released the proposed rule. According to HUD, most sites receive high MOR scores and, therefore, there is less need for conducting MORs as frequently as has been required in the past. For example, in fiscal year 2021, 94 percent of applicable sites received a MOR score of “Satisfactory,” “Above Average,” or “Superior.”

The new MOR schedule establishes a frequency for completing MORs based on a site’s previous MOR score and the site’s rating or classification under a risk-based management model. Under the new system, a site might have a MOR annually, biannually, or every three years. We’ll go over the details of this new risk classification system and how this rating will affect the timing of MORs for your Section 8 site moving forward. The new schedule is effective Sept. 26, meaning that the frequency of MORs described here will begin with the first MOR conducted on or after this date. 

Which Sites Are Affected?

The final rule applies to the Section 8 sites below regardless of whether the review is conducted by a traditional Contract Administrator (CA), Performance-based Contract Administrator (PBCA), or by HUD staff. HUD’s final rule changes the MOR scheduling for the following Section 8 Housing Assistance Payments (HAP) programs:

• New Construction;
• Substantial Rehabilitation;
• State Housing Agencies;
• New Construction financed under Section 515 of the Housing Act of 1949;;
• Loan Management Set-Aside Program;
• HAP Program for the Disposition of HUD-Owned Projects; and
• Section 202/8 program.

HUD has noted that this change does not apply to Mark-to-Market sites. Section 519(b)(1) of MAHRA requires CAs to monitor the status of sites renewed under Mark-to-Market at least annually. Therefore, this schedule doesn’t apply to restructured Mark-to-Market properties.

How Are Sites Classified?

The new MOR schedule establishes a frequency for the completion of MORs based on a site’s previous MOR score and its risk classification. HUD assigns a risk classification for each site. HUD says that an individual site’s risk rating won’t be made publicly available because it’s going to be a part of HUD Multifamily’s process with an owner and manager and could impair a property’s ability to obtain resources needed to make improvements. The risk classifications are:

• Not Troubled;
• Potentially Troubled; or
• Troubled.

The risk rating takes into consideration your site’s financial characteristics such as low debt service coverage ratio, recent occurrences such as default, excessive vacancies, low Real Estate Assessment Center’s (REAC) score, tenant input as assessed during MORs and as provided directly to HUD, and pending transactions with HUD such as foreclosure and partial claim payments. HUD says what measures are considered depend upon whether or not your site is HUD insured.

For HUD-insured sites, the risk classification depends on the likelihood of a claim within 12 months or sooner; whether a partial payment of claim or debt restructuring is in process; the project’s Qualitative Assessment Score, which takes into account qualitative factors such as tenant complaints and local code violations; the project’s vacancy rate, debt service coverage ratio, Real Estate Assessment Center (REAC) score; and whether, for a new construction project, underwriting assumptions have been met.

For non-insured sites, the risk classification depends on whether a HAP termination or foreclosure is pending; whether a transfer of budget authority or of HAP debt, and use restrictions is in process; whether a change in ownership is required; whether the project has problems that make it eligible for a conversion to Housing Choice Voucher assistance that hasn’t begun yet; the site’s vacancy rate; its REAC score; and whether the project is in compliance with any applicable use agreement.

Performance-Based MORs Schedule

Section 8 sites with a risk classification of “Potentially Troubled” or “Troubled” will continue to participate in annual MORs. As a result, the new scheduling changes apply only to sites with a risk classification of “Not Troubled.” If a site's risk classification is “Not Troubled” and:

• If the score on the MOR conducted on Sept. 26 or later is “Unsatisfactory,” the next MOR will be conducted within 12 months;
• If the score on the MOR conducted on Sept. 26 or later is “Below Average,” the next MOR will be conducted within 12 months;
• If the score on the MOR conducted on Sept. 26 or later is “Satisfactory,” the next MOR will be conducted within 24 months;
• If the score on the MOR conducted Sept. 26 or later is “Above Average,” the next MOR will be conducted within 36 months;
• If the score on the MOR conducted on Sept. 26 or later is “Superior,” the next MOR will be conducted within 36 months.

While conducting the MOR, reviewers must examine all documentation in the tenant file going back to the date of the last MOR. In other words, if a site is on a three-year cycle, the reviewer will look at the previous three years of documentation in each file selected for review.

Even though HUD has published this new schedule as a final rule, the rule clarifies that HUD or a contract administrator retains the right to schedule a MOR at any time if:

• HUD publishes a new MOR schedule after public comment;
• Documented concerns at the site require an assessment; or
• The site’s condition or risk rating declines.

New Schedule Implementation

In implementing the new performance-based MOR schedule, you can expect to know the time frame for your site’s next MOR at the first MOR following Sept. 26, the effective date of this final rule. Based upon a site’s MOR score following that first MOR and the risk rating at the time, HUD will determine the date of each project’s next MOR according to the performance-based MOR schedule.

In addition to the above schedule change, the final rule states that a MOR must be conducted within six months of a management or ownership change regardless of the site’s performance-based MOR schedule.

HUD’s New Performance-Based

Management and Occupancy Review Schedule

Under the new final rule, Management and Occupancy Reviews (MORs) will occur on a one-, two-, or three-year schedule based on the previous MOR score and the risk classification according to the table below. Contract Administrators (CAs) will use this chart to schedule all MORS after Sept. 26. It’s important to note that MORs are different from the physical inspections conducted by HUD’s Real Estate Assessment Center (REAC). The new MOR rule doesn’t affect REAC’s inspections of Section 8 sites.