Upon the passage of HERA in 2008, HUD concluded it needed to conduct a rulemaking in order to implement some of the changes contained in HERA to Section 8 Project-Based Vouchers (“PBV”).

PBVs are a tool frequently used in creating and maintaining low-income housing tax credit (“LIHTC”) projects which is why the June 25th publication by HUD of its rule for “The Housing and Economic Recovery Act of 2008 (HERA): Changes to the Section 8 Tenant-Based Voucher and Section 8 Project-Based Voucher Programs” (“Rule”) was mixed news in the LIHTC world.

Good news first. The Rule implements the HERA provision that allows the PBV contract initial rent to be considered a floor rent. This is a provision that many LIHTC investors require.

Now the bad news. The Rule may expand the Davis-Bacon wage rates to projects that previously met the definition of “existing housing” under the PBV program.

Historically, Davis-Bacon wage rate requirements have been applicable only to projects that require prior to closing an Agreement to enter into a Housing Assistance Payments (“HAP”) contract, i.e., projects that are either new construction or substantial rehabilitation of a project that is not in compliance with the Section 8 Housing Quality Standards (“HQS”). Repair work done on “existing housing” did not require the payment of Davis-Bacon wage rates on the rehabilitation work.

The Rule implies Davis-Bacon wage rates apply to existing housing. The preamble states: “However, construction, including rehabilitation work, performed in connection with the initial placement of a project under a PBV HAP contract constitutes development of the project and is subject to Davis-Bacon wage rates where the project contains nine or more assisted units.”

Additionally, the owner certification requirements states “repair work performed after HAP execution within such post-execution period as specified by” HUD, may constitute development activity. This is a revision of the previous owner certification language. If repair work is determined by HUD to be development activity, then Davis-Bacon wage requirements apply.

While the Rule allows the PBV contract initial rent to be considered a floor rent, which is a win for the LIHTC industry, the Rule changes HUD policy with respect to Davis-Bacon wage requirements and existing housing, which may create an additional financial burden on LIHTC projects that can’t afford those costs.