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equire HUD consent to prepay. Some projectsin this category may be eligible for Mark-Up-to-Budget, a parallel program for nonprofit ownersand purchasers (see below). In all other cases,a waiver from HUD headquarters is required.Rents, Contract Terms, and DistributionsHUD determines the initial rents based on marketstudies completed by the owner and HUD. Inaddition to the rent cap of 150 percent of FMR,rents for Section 236 and Section 221(d)(3)BMIR projects will generally be reduced by thevalue of the actual or imputed mortgage subsidy,with some exceptions (see IRPRetention/Decoupling below). For Section 236properties, the market rent is reduced by the IRPsubsidy, typically worth $75-$100 per month. 16The minimum contract term is five years. Themaximum term can be any length—in practice,up to 20 years. Prepayment of the Section 236or BMIR mortgage is prohibited during the contractterm, except as part of a transaction topreserve affordability. Importantly, owners donot have to renew their contracts once the initialterm expires—which effectively limits thevalue of Mark-Up-to-Market as a preservationtool to five years.During the contract term, rents will be adjustedby the Operating Cost Adjustment Factor(OCAF), as published by HUD, up to the marketrent cap, which is also OCAF-adjusted. Rentswill be readjusted to market (up or down) everyfive years based on new market comparabilitystudies prepared by the owner and HUD. Whilethese policies may put Mark-Up-to-Market ownersat a disadvantage between the five-yearreadjustment intervals, the project-based contractcompensates by reducing risk.In a Section 236 or 221(d)(3) BMIR project thatis only partially Section 8-assisted, owners arepermitted to take the increase in Section 8 rentsas a distribution in addition to the originalallowable dividend. In all other Section 8 projects,owners participating in Mark-Up-to-Marketreceive unlimited distributions. Any state orlocal restrictions on owner distributions in unitssubject to mark-up are preempted, except inprojects financed by a state housing financeagency (HFA).Non-Section 8 UnitsIn a partially-assisted Section 8 project, rentsare marked up only for those units covered bythe expiring Section 8 contract(s). Rents in anynon-Section 8 units, units occupied by Section8 voucher-holders, or units covered by a nonexpiringcontract remain unchanged. From anadvocacy perspective, this rent skewing featureof Mark-Up-to-Market offers the double benefitof holding harmless tenants in existing affordablenon-Section 8 units while preserving theSection 8 units as well. However, the lower thepercentage of Section 8 units, the less attractivethis option is likely to be to an owner whois considering opting out.2. MARK-UP-TO-BUDGET:NONPROFIT OWNERS AND PUR-CHASERS 17Under the Mark-Up-to-Budget program, which issimilar to Mark-Up-to-Market , nonprofits canmark Section 8 rents up to market rates(capped at 150 percent of FMR, or higher with aHUD waiver), if justified by documented projectneeds (budget-based rents). Mark-Up-to-Budget can be used under two circumstances:for acquisition of the property (if a nonprofit isthe purchaser), or for capital repairs (if a nonprofitis the current or prospective owner).Mark-Up-to-Budget enables nonprofit ownersand purchasers to support additional debt foracquisition or rehab while preserving theSection 8 units. Like Mark-Up-to-Market, thisprogram is available only when the existing pre-MAHRA contract expires, or anytime thereafter.HUD has published "safe harbor" rules forMark-Up-to-Budget in Chapter 15 of its "Section8 Renewal Policy Guidebook." 18 Transactionscomplying with these rules can be approved bythe HUD field office. All other cases require awaiver from HUD headquarters.EligibilityEligibility criteria for Mark Up-to-Budget aremuch less restrictive than the criteria for Mark-Up-to-Market. Projects can have comparablemarket rents that are less than 100 percent ofFMRs, and they can mark up despite low- andmoderate-income use or prepayment restric-10 chapter two: Federal Preservation Tools10