HUD Tells How to Convert Studio Units into One-Bedrooms

HUD is providing owners and managers with guidance on converting studio units into one-bedrooms.

By issuing an official memo on conversions this February, HUD is seeking to impose consistency on a regulatory area in which there had previously been no clear policy, says Denise Muha, executive director of the National Leased Housing Association (NLHA). Muha explains what the recent memo outlining new requirements on conversions could mean to you as an owner or a manager.

Who Grants Permission to Convert

Send requests for unit conversions to HUD headquarters, which retains authority over permissions, or to HUD's regional hubs, which will also be reviewing requests for conversions. Hubs will submit their recommendations to HUD headquarters.

How to Remain in Compliance

The memo indicates that before HUD will allow you, as a site owner, to proceed with a conversion, you must:

1. Promise that the conversion will not result in HUD's having to provide additional funding to the site;

2. Show that the average vacancy rate among studio units is at least 25 percent for two years over the prior 36-month period; and

3. Provide evidence of efforts to market studio units proposed for conversion, and of demand for the post-conversion unit type.

Subsequent to unit conversion, your project debt service coverage ratio must be 1.1 or greater. In addition, you must convert units covered under a certain HUD program into a type falling under that same HUD program. For example, Section 202/811 studio units must be converted into one-bedrooms within the Section 202/811 program.

The memo also lists documents that owners must submit to HUD, including evidence that any lender involved consents to proposed conversions.

Rent Cap

HUD is requiring that unit rents must be capped at current rents. Therefore, the rent for a one-bedroom that had been a studio unit can't be higher than the rent of a current one-bedroom or that of the combined rents of two converted studio units. And according to low-income housing tax credit (LIHTC) program rules, the rent shall be limited to the tax credit rent or to the comparable market rent, whichever is lower.

EDITOR'S NOTE: You can get a copy of the HUD memo on conversions by going to http://www.hudnlha.org and clicking on HUD Documents/Multifamily.

Programs Affected

HUD's guidance memo applies to the following types of sites: Section 202/811, Section 236, Section 221(d)(3), Below Market Interest Rate (BMIR), Section 8 project-based assistance, Rent Supplement, and any site that is subject to a HUD use agreement or deed restriction.

Further reading: See “Dealing with HUD: Converting Studio Units into One-Bedrooms,” in the July 2008 issue of our sister publication, Assisted Housing Management Insider, p. 5.

Insider Source

Denise Muha: Executive Director, National Leased Housing Association; 1900 L St. NW, Washington, DC 20036; (202) 785-8888; info@hudnlha.org.