Low Inspection Scores Threaten Section 8 Payments

Failing to take the Real Estate Assessment Center’s (REAC) physical inspection seriously can endanger the status of your project-based Section 8 tax credits. That’s what happened to one owner of a 77-unit residential property receiving project-based Section 8 housing payments from HUD. After the site received low scores on two consecutive physical inspections, HUD terminated the payments. The owner said that HUD violated the Administrative Procedures Act when it failed to follow its own procedures to abate Section 8 payments under a housing assistance contract that the owner entered into with the Indiana Housing and Community Development Authority (IHCDA). HUD contended that it had the authority to abate payments to the owner.

The court said that although HUD may have bypassed the IHCDA’s involvement in the last step of the process to abate Section 8 payments, under the contractual and regulatory guidelines, the federal agency still had the authority to direct the IHCDA to abate the assistance payments based on the facts of the case. Although HUD had made a technical misstep, the court said that it did not warrant a remand, and denied the owner’s motion for relief.

According to the Annual Contributions Contract (ACC) that the IHCDA (and other housing authorities) have with HUD, HUD is entitled to conduct a baseline physical inspection for every Section 8 property with a HUD-administered HAP contract. Once the REAC inspection is completed, HUD may determine the frequency of future inspections, and may issue a task order under the ACC to have the PHA perform annual physical inspections. In a memorandum dated April 7, 2003, HUD said that it will no longer provide assistance to properties where “tenants are not receiving quality housing.” HUD gives owners another opportunity to achieve a passing physical inspection score.

n Senate Manor Properties, LLC v. U.S. Department of Housing and Urban Development (11/24/2008).