Navigating Payment Standard Changes: What Investors Need to Know

The financial landscape of the Housing Choice Voucher (HCV) program is not static. Payment Standards, the key figures that determine the maximum government subsidy, are reviewed and adjusted annually. For a real estate investor, these shifts represent both potential opportunities for increased revenue and risks of decreased payments.

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The Annual Review Cycle

Changes to Payment Standards don’t happen arbitrarily. They are part of a predictable annual cycle driven by HUD and your local Public Housing Authority (PHA).

1. HUD Publishes New FMRs: Annually, HUD releases updated Fair Market Rents (FMRs) for every market in the country.
2. PHA Reviews Standards: The Payment Standards guidebook mandates that the PHA must review its Payment Standard schedule each year after the new FMRs are published.
3. PHA Adjusts the Schedule: The PHA must then ensure its Payment Standards remain within the “basic range” (90% to 110%) of the new FMRs. The PHA has up to three months from the effective date of the new FMRs to officially update and publish its Payment Standard schedule.

This process means you can anticipate changes to the standards on a yearly basis. The key question is, how do those changes affect the HAP contract for a tenant you already have in your unit?

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When Payment Standards Increase

This is the best-case scenario for an investor. An increase in the Payment Standard creates more room in the subsidy calculation, which can support a higher contract rent (provided it is still deemed “reasonable”).

However, the change is not immediate. For an existing tenant under a HAP contract, the Payment Standards guidebook states that the new, higher Payment Standard is first used to calculate the HAP at the family’s next regular (annual) reexamination that occurs on or after the effective date of the increase.

Example:

• The PHA increases the Payment Standard for a 2-bedroom unit on July 1, 2024.
• Your tenant’s annual reexamination date is October 1^st.
• The new, higher Payment Standard will be applied to your HAP payment calculation starting on October 1, 2024. Their HAP payment for July, August, and September will be calculated using the old, lower standard.

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When Payment Standards Decrease

A decrease in the Payment Standard can feel alarming, but there are significant protections built into the program for both tenants and owners with an existing lease. Thanks to the Housing Opportunity Through Modernization Act (HOTMA), PHAs have considerable flexibility to cushion the blow.

1. Hold Harmless (No Reduction in Subsidy)

This is the most favorable policy for investors. The PHA may choose to continue using the existing, higher Payment Standard for the family’s subsidy calculation. This protection remains in effect for as long as the family continues to receive assistance in that same unit. In this scenario, your HAP payment is shielded from the decrease.

2. Gradual Reduction in Subsidy

Under this policy, the PHA phases in the reduction over time. The rules are highly protective:

• The initial reduction cannot take place before the effective date of the family’s second regular reexamination following the decrease.
• From that point, the reduction can proceed annually until the family’s subsidy is based on the new, lower Payment Standard. This gives you and the tenant at least two years of buffer before any financial impact is felt.

3. No Change in Policy (The Pre-_HOTMA Method)

This is the least protective option, but still includes a delay. The PHA uses the new, lower Payment Standard to calculate the family’s HAP beginning at the effective date of the second regular reexamination following the decrease.