HUD Proposes Updated Housing Inspection Scoring Methodology

Unless the IRS states otherwise, as of Oct. 1, the inspection standards for monitoring will become NSPIRE.

The IRS requires your state or local housing credit agency to perform physical inspections of sites awarded LIHTCs. This requirement ensures sites are in a safe, decent, sanitary condition and in good repair. Specifically, Section 42 of the Internal Revenue Code requires state housing agencies to conduct on-site inspections of all buildings by the end of the second calendar year following the year the last building in the project is placed in service. In addition, the code says that the agency must also conduct on-site inspections and low-income certification review at least once every three years after the initial on-site inspection.

Your state housing agency has a choice of which standards it may use when inspecting your tax credit site. Your agency may use local building, safety, and health codes. Or it may use HUD’s Uniform Physical Condition Standards (commonly known as “UPCS”). Existing Treasury Regulations 1.42-5 (Monitoring Regulations) directly references 24 CFR 5.703, which currently references the UPCS Inspection Protocol. State housing agencies usually prefer to use HUD’s UPCS standards because they’re the same for tax credit sites throughout the state, which isn’t the case with local codes.

HUD is in the process of transitioning to a new housing inspection program called “NSPIRE” which will replace the UPCS inspection standards. According to a HUD announcement earlier this year, HUD’s NSPIRE changes are scheduled to roll out as of Oct. 1, 2023. Therefore, unless the IRS explicitly states otherwise, as of Oct. 1, the inspection standards for monitoring will become NSPIRE.

Most recently, HUD published its proposal for the new physical inspection scoring and ranking methodology. We’ll discuss HUD’s new approach for scoring the safety and habitability of housing under NSPIRE. Ultimately, HUD is seeking to implement a new simplified inspection system that more accurately reflects the physical conditions within housing units and to place a greater emphasis on issues like lead-based paint hazards and mold.

New Scoring Approach

The new NSPIRE scoring approach is very different from the ones used by HUD’s Real Estate Assessment Center (REAC) since 1999. For HUD, the NSPIRE inspection protocol will replace the UPCS and the Housing Quality Standards (HQS). The HQS Inspection Protocol has been in effect since 1979 for Voucher Programs and grant-based programs. And the UPCS Inspection Protocol started in 1999 for Multifamily and Public Housing.

HUD Secretary Marcia L. Fudge explains the change to NSPIRE as “prioritizing the health and safety of our residents by taking this step for the first time in 20 years. NSPIRE will formally align expectations of housing quality and consolidate inspection standards across HUD programs to raise the bar for what conditions exist in HUD assisted properties.”

Currently, UPCS inspections are risk-based inspections. A risk-based inspection takes a sampling of results and determines what risk may be present on the entire property and the owner’s general operation. REAC inspection used these risk ratings as a predictive indicator of whether there were likely more significant issues at a property. In comparison, HQS inspections are results-based and these inspection standards are used to create a list of items that needed to be corrected to participate in a HUD-funded program.

The updated NSPIRE inspection protocols seek to combine the aims of both approaches. It uses a “risk-based” approach of using results to encourage better day-to-day compliance and a “results-based” approach, which aims to see the issues correctly in a prompt manner. Also, NSPIRE inspection standards and scoring methodology reflect NSPIRE’s goals of focusing on the health and safety of residents over curb appeal and on life-threatening and severe deficiencies inside units, resulting in more scoring impact than those outside the units.

Three Components of NSPIRE

NSPIRE is intended to align the expectations of housing quality and to consolidate the inspection standards across HUD programs. The scoring notice, once finalized, will apply to all HUD housing currently inspected by HUD’s REAC.

According to HUD, NSPIRE transforms how HUD manages the quality of affordable housing units with stronger standards, better inspections, greater insights, and healthier and safer homes for residents. It will accomplish this by:

• Prioritizing health, safety, and functional defects over appearance;
• Focusing on the areas where residents spend the most time—their units;
• Improving sampling and providing a more accurate score for property conditions;
• Improving compliance monitoring and enforcement for failing scores;
• Aligning inspection standards across all HUD-assisted properties; and
• Incorporating resident feedback regarding the condition of units.

Specifically, NSPIRE is designed around three components and these components are intended to help accomplish HUD’s goals with the updated inspection program.

Inspectable Areas

Under UPCS, there are five inspectable areas. With NSPIRE, HUD establishes and consolidates the inspectable areas of a REAC inspection into three easily identified locations: Unit, Inside, and Outside. This increases the usability of the standards and streamlines the inspection process. To ensure that all residents live in safe, habitable homes, the items and components located inside the building, outside the building, and within the units of HUD housing must be functionally adequate, operable, and free of health and safety hazards.

UNIT: A “Unit” of housing refers to the interior components of an individual dwelling, where the resident lives. Examples of components included in the interior of a unit may include the balcony, bathroom, call-for-aid (if applicable), carbon monoxide devices, ceiling, doors, electrical systems, enclosed patio, floors, HVAC (where individual units are provided), kitchen, lighting, outlets, smoke detectors, stairs, switches, walls, water heater, and windows.

INSIDE: Inside means the common areas and building systems that can be generally found within the building interior and are not inside a unit. Examples of “inside” common areas may include basements, interior or attached garages, enclosed carports, restrooms, closets, utility rooms, mechanical rooms, community rooms, day care rooms, halls, corridors, stairs, shared kitchens, laundry rooms, offices, enclosed porches, enclosed patios, enclosed balconies, and trash collection areas.

OUTSIDE: “Outside” refers to the building site, building exterior components, and any building systems located outside of the building or unit. Examples of “outside” components may include fencing, retaining walls, grounds, lighting, mailboxes, project signs, parking lots, detached garage or carport, driveways, play areas and equipment, refuse disposal, roads, storm drainage, non-dwelling buildings, and walkways.

Deficiency Categories

A deficiency is a defect or condition cited in a HUD physical inspection when an inspectable item is missing, flawed, or not functioning as designed. Deficiencies differ by classification and severity, and deficiency definitions built into NSPIRE specify what must be recorded for a given deficiency.

NSPIRE has abandoned the UPCS levels of deficiency (1-3, from least to most severe) in favor of a model that just identifies whether there is a specific deficiency or not. The severity is indicated by the overall category of deficiency. And the majority of deficiencies are now considered Health and Safety deficiencies.

The correction time frames for repair or abating deficiencies vary by the type of deficiency or HUD program. In particular, health and safety deficiencies have strict deadlines to correct and report as corrected to HUD. For severe health and safety deficiencies, an owner has 24 hours to correct and 72 hours to report to HUD as corrected. And for standard health and safety deficiencies, and owner has 30 days to correct and 35 days to report to HUD as corrected.

Health and safety. This category makes up most of the NSPIRE deficiencies because they are believed to be focused on the most critical elements that impact resident safety and habitability. A health and safety deficiency is a condition that could affect the resident’s mental, physical, or psychological state. A resident could become injured because of this condition. There are two main categories of health and safety deficiencies: standard and severe. And the severe category is broken down into life-threatening and non-life-threatening.

Function and operability. These deficiencies are those where the resident is unable to use certain fixtures, features, or appliances. These are items that are reasonably assumed to be part of their rent. An example would be a sink that’s constantly running. A function and operability deficiency may increase the resident’s utility bill significantly if not corrected. These deficiencies require repair based on the property’s routine maintenance plan.

Condition and appearance. These deficiencies are those where components of the property don’t meet reasonable expectations of condition and appearance or are damaged. This category includes deficiencies where HUD or the property could suffer reputational harm, or where a resident could incur additional costs because of this condition. This category of deficiency requires repair based on the property’s routine maintenance plan.

Proposed NSPIRE Scoring Format

The NSPIRE scoring methodology converts observed defects into a numerical score, and it is easier to understand than under UPCS. It implements the proposed rule’s intent to provide reliable evaluations of housing conditions and to protect residents. In evaluating the prior inspection standards and scoring, HUD identified a disproportionate emphasis around the appearance of items that are otherwise safe and functional and that the standards paid inadequate attention to the health and safety conditions within the built environment.

Use of inspection scores. HUD intends to continue using the zero to 100-point scale for purposes including (but not limited to):

• Frequency of Inspections: Properties that score higher are inspected less frequently;
• Enforcement: Properties that fail or score below certain thresholds may be subject to HUD enforcement actions, including referral to HUD’s Departmental Enforcement Center (DEC);
• Public Housing Assessment System (PHAS) Designations: Average weighted inspection scores comprise forty (40) points of a public housing agency’s PHAS designation;
• Participant Evaluation: Inspection scores are considered when determining whether a potential or existing HUD Multifamily business stakeholder may expand its involvement in HUD housing; and
• Risk Assessment: HUD’s Offices of Multifamily Housing and Public Housing use inspection scores and pass/fail designations to assess the risk of owners/agents and public housing agencies.

Scoring calculations. With the proposed scoring format, standards that are categorized as more severe should have a greater impact on a property’s score when deficiencies exist in the unit, and a property with observed health and safety defects in its units is more likely to fail an inspection than a comparable property with less severe defects.

HUD has developed the following table that identifies defect impact weights and which will be applicable to all properties:

To calculate a site’s score, for each of the categories above, the number of deficiencies on an inspection will be multiplied by the number in this chart, and then that value will be divided by the unit sample. So, for instance, if an inspection contains 10 sampled units, and the inspection found four life-threatening issues in the units and three moderate defects inside, the score for the Unit section would be 240 (60 x 4) and the score for the Inside section would be 15 (5 x 3). These figures are then divided by the unit sample of 10, which amounts to 24 and 1.5. These numbers are deducted from 100, resulting in a score of 74.5, or 75 after being rounded to the nearest whole number.

According to HUD, calculated scores are rounded to the nearest whole number with one exception. For sites that score between 59 and 60, the score will be rounded down to 59. This reflects HUD’s concern that properties must surpass these scoring thresholds to be considered at or above those scores which may dictate HUD’s administrative, oversight, monitoring, and enforcement approach for poorly scoring properties.

Fail scores. There are two situations in which a site will be considered to have failed inspection. Failure to achieve a score at or above 60 is considered a failing score, and properties that score under 60 are required to perform additional follow-up and may be referred for administrative review under current regulations. Also, consistent with HUD’s goal of maximizing the health and safety of a unit, sites with unit point deduction 30 or above are considered failures even if, for example, the rest of the property is in pristine condition.

Letter grades. The notice also states that HUD will assign a letter grade to each property inspection score. This will assist HUD, ownership and/or management, residents, and the public to better understand the condition of the property and to guide administrative activities such as oversight, risk management, and enforcement. Regulations covering HUD’s expected actions for scores of 30 or less, or two successive scores under 60, will be in the final NSPIRE rule.