Legal Alert

Significant Increases to 2023 Operating Cost Adjustment Factors

by Georgi Banna
November 16, 2022

Summary

The U.S. Department of Housing and Urban Development (HUD) has released a Federal Register notice that provides updated operating cost adjustment factors (OCAFs) for 2023. OCAFs are used to adjust the rent to current market conditions on eligible multifamily housing projects with project-based contracts issued under Section 8. OCAFs also are used to adjust the rents of project-based voucher and project-based rental assistance properties.

The Upshot

  • OCAFs are determined using nine cost components: electricity, fuel oil, natural gas, employee benefits, employee wages, goods/supplies/equipment, insurance, property tax, and water/sewer/trash.
  • OCAFs for 2023 range from 4.8 percent to 8.3 percent with a national average of 6.1 percent.
  • The 2023 OCAFs can be applied to eligible projects with a contract anniversary date on or after February 11, 2023.

The Bottom Line

HUD will accept comments on the two changes to the OCAF calculation—the switch from May to August data pull and the change of the source of the insurance cost component data—until December 15, 2022.

The U.S. Department of Housing and Urban Development (HUD) has released a Federal Register notice that provides updated operating cost adjustment factors (OCAFs) for 2023. OCAFs are used to adjust the rent to current market conditions on eligible multifamily housing projects with project-based contracts issued under Section 8 of the United States Housing Act of 1937 and renewed under the Multifamily Assisted Housing Reform and Affordability Action of 1997 (MAHRA). OCAFs are also used to adjust the rents of project-based voucher (PBV) and project-based rental assistance (PBRA) properties that have gone through the Rental Assistance Demonstration (RAD) program. The 2023 OCAFs can be applied to eligible projects with a contract anniversary date on or after February 11, 2023.

OCAFs are calculated to the state and territory level with the appropriate OCAF applied to the portion of rent attributable to operating expenses not including debt service based on the location of the property. For 2023, the OCAFs range from 4.8 percent in South Dakota to 8.3 percent in Maine with a national average of 6.1 percent. The 2023 OCAFs are a significant increase over the 2022 OCAFs (ranging from 1.8 percent to 3.5 percent and a national average of 3.1 percent) and shows the impact of generationally high inflation across the country. The state and territory 2023 OCAFs are included at the end of the Federal Register notice.

OCAFs are determined using nine cost components–electricity, fuel oil, natural gas, employee benefits, employee wages, goods/supplies/equipment, insurance, property tax, and water/sewer/trash–and generally look at year-over-year changes in each of the cost components with data being pulled in May of each year. For the 2023 OCAFs, HUD used the latest available data that resulted in a comparison of a time period more than a year for some cost components. For example, the water/sewer/trash cost component compared the May 2021 data to July 2022 data–a 14-month comparison rather than 12-months. The later data pull allowed HUD to catch the additional impact of increased inflation on many of the cost components resulting in OCAFs that more closely represent the current market conditions. Going forward, beginning with 2024 OCAFs, HUD will pull data in August of each year so the OCAFs can be released closer to the data pull resulting in more accurate OCAFs.

HUD made one additional change that impacted the 2023 OCAFs, the data source for the insurance cost component was changed. Rather than using the Bureau of Labor Statistics, Consumer Price Index, Tenants and Household Insurance Index, HUD switched to the Bureau of Labor Statistics, Producer Price Index, Direct Property and Casualty Insurers-Commercial Multiple Peril Insurance Series. HUD states that the new data source provides a better metric for the insurance cost of leased rental housing properties.

HUD will accept comments on the two changes to the OCAF calculation–the switch from May to August data pull and the change of the source of the insurance cost component data until December 15, 2022.

Ballard Spahr is a national leader working at the forefront of the legal and business elements of affordable housing and community development, including the RAD program. Our attorneys ensure that clients get the most benefit from transactions and help navigate shifts in the market, regulatory obligations, and government incentive programs. Please reach out if you have questions, or visit us at our Affordable Housing and Community Development web page.

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