HUD Terminates Payments to Owner of Section 8 Property That Fails REAC Inspections

After the owner of a 77-unit Section 8 project received low scores on physical inspections, HUD terminated the Section 8 payments. The owner sued HUD, claiming that HUD violated the Administrative Procedures Act (APA) when it failed to follow its own procedures to abate Section 8 payments under the terms of the housing assistance contract that the owner had entered into with the Indiana Housing and Community Development Authority (IHCDA). HUD said it had the authority to abate payments to the owner because the property had received physical inspection scores below a certain threshold on two consecutive occasions.

HUD filed a motion for summary judgment to the APA claims.

A district court concluded that, although HUD might have bypassed IHCDA’s involvement in the last step of the process to abate Section 8 payments, under the contractual, statutory, and regulatory guidelines, HUD still had the authority to direct the IHCDA to make the abatement because the site scored low on its physical inspections. The technical misstep in this case was not one that required a remand because HUD’s underlying decision-making process was not arbitrary or capricious. The court denied the owner’s request for relief and granted HUD’s motion for summary judgment.

PRACTICAL POINTER: The Annual Contributions Contract (ACC) that the Indiana Housing Finance Authority had with HUD had this to say about inspections of Section 8 projects:

HUD has or will conduct a baseline physical inspection for every Section 8 property with a HUD-administered HAP contract. The Real Estate Assessment (“REAC”) physical inspection software and protocol is being used for all inspections. (See http://www.hud.gov/reac/
reaphyin.html.)
Once this baseline physical inspection is completed, HUD will determine frequency of future inspections. HUD may issue a task order under the ACC to have the PHA perform annual inspections. If such a task order is issued, HUD will negotiate with the PHA a fixed-price fee for such services at the time.

For those properties that do poorly on the inspections, HUD will: follow-up with the owner on violations and corrective actions needed; provide a timeframe to correct the violations; work with the owner to eliminate the deficiencies; abate payments when the owner fails to correct the violations within the designated time period; notify the local HUD office of the abatement and the reason why; and take legal action to enforce the HAP contract. The ACC also excludes third parties from suing under the provisions of the contract. Among the problems the REAC inspection uncovered for the project-based Section 8 property in this case were: chipping and peeling paint throughout the exterior of the building; loose wood siding; rust and deteriorating steps and railings; and exposed wiring, to name a few.

n Senate Manor Properties, LLC v. U.S. Department of Housing and Urban Development, November 2008.