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Winning Reasonable Accommodation Cases

Every owner and manager of a housing development understands (or should understand) that disabled applicants and residents have the right to request that properties be modified (reasonable modifications) or that rules be changed or waived (reasonable accommodations) so that the disabled person has an equal opportunity to use and enjoy the housing. However, the law does not require that every request for an accommodation be granted. Requests may be denied if there is no need for the requested accommodation or if granting the request would impose an undue financial and administrative burden on the property or fundamentally alter how the property operates. In order to demonstrate that an owner has violated fair housing law by failing to grant an accommodation request, an applicant or resident must prove that: The request for a reasonable accommodation was made by or on behalf of an individual with a disability;The community knew - or was aware of - the disability (owners may verify disabilities that are not obvious);The request was necessary for the disabled individual to have an equal opportunity to enjoy the housing (i.e., there is an identifiable connection between the requested accommodation and the disability);The request was reasonable (owners should remember that even when a request is determined to be "unreasonable," the community should engage in an interactive process that examines alternative accommodations that would meet the needs of the disabled person and that are reasonable); andThe community denied the request. While owners often believe that any requested accommodation must be granted, this is not the case, as illustrated by a number of recent court cases. In this series of articles, I will examine court cases that have ruled against residents for requested accommodations relating to assistance animals, noise complaints, and smoking. This first article deals with the issue of whether a community has to permit a resident to keep a dangerous assistance animal. Borenstein v. Nellis Gardens, Nevada, May 2019 This case makes it clear that dangerous animals do not have to be permitted as assistance animals if there is proof that the animal presents a direct threat to other residents. Facts of the Case A resident had a service dog and lived in the community for several years with no issues.The dog died, and the resident obtained another service dog of the same breed.The community provided evidence that the replacement dog lunged at residents, chased children and dogs, and bit at least one other dog.The resident refused requests to muzzle the dog.The community started eviction proceedings due to the resident s failure to control the dog, and the state court ordered eviction of the tenant.The resident then filed suit in federal court.Based on the resident s allegations that the community was evicting him because of the service dog, the court granted a temporary hold on the eviction pending a hearing.The court ordered the resident to muzzle the dog until the hearing.The resident did not comply with the court order and admitted that he took the dog outside without a muzzle.The federal court ruled in favor of the community. Reasoning According to the court, the community had initiated the eviction proceedings because of his failure to control the new dog - not due to the resident s disability or his use of a service animal.It was not reasonable to require the community to accommodate a service animal that displayed aggressive and dangerous behavior toward other residents. This case reiterates what other similar cases have shown - under fair housing law, communities may deny a request for an assistance animal if the specific animal would pose a direct threat to the health and safety of others - or would cause substantial physical damage to the property of others, and the risk cannot be reduced or eliminated by another reasonable accommodation. The next article in this series will cover a case that answers the question as to whether a community has to soundproof a unit due to a claim of excess noise.

IRS Chief Counsel Memorandum Takes Hard Line on LIHTC Common Area Noncompliance

An IRS Chief Counsel Memorandum issued on May 22, 2019 takes a hard line regarding the noncompliance of common area for purposes of 42 Low-Income Housing Credit. The memo was prepared by the Office of Associate Chief Counsel (Passthroughs and Special Industries) in response to a request for clarification from an IRS Program Manager for Technical Issues. While this is an IRS internal document, and cannot be cited as precedent, it does provide clear guidance regarding how the IRS may approach the issue of common area noncompliance during an audit, or as a result of the issuance of an 8823 by a Housing Credit Agency (HCA). Clarification was requested relating to three issues: Should the noncompliance of a common area in a qualified low-income building, based on a failure of the inspection standards under 1.42-5(d) of the Income Tax Regulations or any requirements under 42, be treated as a change in the eligible basis of the building in the taxable year in which the noncompliance occurs?If the noncompliance of a common area in a qualified low-income building is treated as a change in the eligible basis of the building in the taxable year in which the noncompliance occurs, for purposes of determining if recapture under 42(j) is appropriate, is the change a reduction in the amount of the total costs attributable to the specific common area that was included in the eligible basis of the building, or in the amount of the costs attributable only to the noncompliant portion of the common area?As an alternative, should the noncompliance of a common area be treated as a change in the applicable fraction of the building, as if one of the low-income units located the closest to the non-compliant common area was out of compliance? The IRS concluded "yes" for issue #1. Common area violations are an eligible basis issue. Issue #2 is where the IRS has taken a very hard line. As stated in the Memo, "For purposes of determining recapture under 42(j), a change in the eligible basis of a qualified low-income building is a reduction in the eligible basis of the building in the amount of the total costs attributable to the specific common area that was included in the eligible basis of the building. The reduction in the eligible basis is not the amount of the costs attributable only to the portion of the noncompliance common area." Issue #3, was addressed with a straightforward "no." Noncompliance of a common area should not be treated as a change in the applicable fraction of a building. Detailed Analysis of the IRS Position Issue One Common areas in a LIHTC project are residential rental property if functionally related and subordinate to the qualified LIHTC building or project. Under 42(d)(4)(A) and (B), the eligible basis for a LIHTC building includes the adjusted basis of the property used in common areas or provided as comparable amenities to all residential rental units in the building. Therefore, if a common area of a LIHTC building is non-compliant under the inspection standards or any other requirements under 42 during the compliance period, and if the noncompliance is uncorrected as of the close of the taxable year in which the noncompliance occurs, the noncompliance should be treated, in the taxable year in which the noncompliance occurs, as a change and reduction in the eligible basis of the building. Note the use of the term "or any other requirements." This indicates that violation of any requirement relative to common area - such as charging a fee for use of the area - will also result in a reduction in eligible basis. Issue Two In the event of a reduction in eligible basis due to noncompliance in a common area, recapture under 42(j) may be triggered. The eligible basis is the adjusted basis that was determined as of the close of the first year of the credit period. The reduction in the eligible basis is not limited to the amount of the costs attributable to only the portion of the non-compliant common area that was included in the eligible basis of the building. Instead, the eligible basis of the building is reduced by the amount of the total costs of the specific common area that caused the noncompliance. The memo provides the following example to illustrate how this will work: A qualified low-income building contains multiple common areas. One of the common areas is a laundry room for use by all tenants of the building without additional charge. The laundry room contains 20 laundry machines. For purposes of the LIHTC under 42, the costs of the entire laundry room ($40,000), and those of the 20 laundry machines ($10,000), were included in eligible basis (a total of $50,000) as of the close of the first year of the credit period. In June of Year 3, during the compliance period, the HCA inspected the building and discovered that ten of the laundry machines were not properly functional and, therefore, the common area (the laundry room) was deemed noncompliant. The HCA gave the owner 90 days to correct the noncompliance, but the noncompliance was not corrected and remained uncorrected at the end of Year 3. Therefore, in year 3, there is a reduction in eligible basis in the amount of the total costs of the laundry room that were included in eligible basis ($50,000), because the laundry room was noncompliant. The reduction is not limited to the amount of the costs attributable to the nonfunctional laundry machines ($5,000).Also, if the adjusted basis of the common area is allocated to the eligible basis of one or more buildings in the project for credit calculation purposes, such as a carport that is for use by all of the tenants of a qualified multi-building LIHTC project, the reduction in the eligible basis of the buildings will be allocated among the buildings. This position indicates that if even a relatively small area of a common area is noncompliant, the eligible basis for the entire area is lost. For example, one parking space in a parking lot that cannot be used due to the condition of the space could result in the loss of eligible basis for the entire parking lot. Issue Three Treating the noncompliance of a common area as if one of the low-income units located closest to a noncompliant common area was out of compliance is not a valid alternative, since it does not properly and accurately account for the change caused by the noncompliance of a common area. Reporting the Noncompliance If common area noncompliance is discovered by the HCA, the memorandum states that the HCA should check both box 11c (violation of UPCS standards [if the violation is an inspection standard violation]), and box 11e (reduction in eligible basis) on the 8823. Conclusion This is unwelcome guidance. While we have always known that violations of the rules relating to common area could result in credit loss and recapture, it has been common practice to allocate the basis reduction to the area of the common area that was affected by the noncompliance, often using a square foot calculation. This memorandum suggests that such an approach may not be acceptable to the IRS and that any violation of common area rules may result in a loss of the entire common area from eligible basis. This is just one more reason why owners and managers must ensure that common areas remain in sound physical condition and that the rules relating to the use of common area are carefully followed.

Save Affordable Housing Act of 2019

On June 25, 2019, four U.S. Senators and three members of the House introduced the Save Affordable Housing Act of 2019. The sole purpose of this proposed legislation is to repeal the qualified contract option for the federal Low-Income Housing Tax Credit (LIHTC). Background LIHTC projects are required to comply with IRS requirements for 15-years (the Compliance Period) and a minimum of 15 additional years (the Extended Use Period) under a State controlled Extended Use Agreement. This minimum term of 30-years is known as the "Extended Use Period." There are two ways a LIHTC property can exit an Extended Use Agreement prior to the end of the 30-year period: (1) Foreclosure; and (2) When a "qualified contract" request is made to the State Housing Credit Agency (HCA) and the HCA is unable to find a qualified contract purchaser within 12- months of the request. Through the years, it has become clear that the qualified contract formula price almost always exceeds the market value of the property as affordable housing, allowing owners to terminate the agreement when the HCAs cannot find a willing purchaser. The Proposed Legislation The proposed legislation would permit owners of LIHTC projects to request a qualified contract purchase of their project only if the project received an allocation of credits, or an issuance of bonds that resulted in an allocation of credits, before January 1, 2019. For projects allocated credits prior to January 1, 2019 that are eligible to request a qualified contract purchase, the legislation would amend Section 42(h)(6)(F) to require that the qualified contract price would be the fair market value of the entire project. Current law requires only that any non-low-income portion of a project be valued based on fair market value. The low-income portion is valued based on a qualified contract formula, which has no relation to market value. The proposed law would require that when determining the fair market value of the low-income portion of a project, the housing credit agency must use the restricted rents required by the LIHTC program. Following passage of this proposed law, the Treasury Department would be required to issue regulations relating to the determination of market value. If passed, the law will apply to all buildings for which a written request for a qualified contract purchase was made after the date of the enactment of the law. Summary If passed, the Save Affordable Housing Act of 2019 would, Repeal the qualified contract option for any project allocated credits after 2018; andBase the qualified contract price for properties remaining eligible on market value instead of the formula value. This second result will lead to more willing purchasers, who would be required to maintain the affordability of the current projects throughout the extended use period, while still allowing current owners to terminate ownership and management of a property.

IRS Issues New Guidance on General Public Use Rules - Revenue Procedure 2019-17

The IRS has issued Revenue Procedure 2019-17, which allows projects with tax-exempt bonds issued on or after April 3, 2019, to apply the general public use rules for residential rental housing in the same manner the rules are applied for Low-Income Housing Tax Credit (LIHTC) projects under Section 42 of the Internal Revenue Code. Under 42(g)(9) a project does not violate the general public use requirement as a result of specified occupancy restrictions or preferences (e.g., a housing preference for military veterans). Background Under 1.103-8(a)(2) of the Income Tax Regulations, to qualify for private activity tax-exempt bonds, a facility must serve or be available on a regular basis for general public use. For example, an apartment building for which employees of an adjacent factory are given preference over other potential tenants would not be considered available to the general public. 1.42-9(a) provides that a residential rental unit is for use by the general public if the unit is rented in a manner consistent with housing policy governing non-discrimination, based on HUD rules. One example of a unit that is not available to the general public is one that is provided only for members of a social organization or provided by an employer for its employees. Such units are not considered low-income units. 42(g)(9) provides that a project does not fail the general public use test solely because of occupancy restrictions or preferences that favor tenants (A) with special needs; (B) who are members of a specified group under a Federal or State program or policy that supports housing for such a group; or (C) who are involved in artistic or literary activities. Another example are Federal and State programs that support housing for military veterans. 142(d) does not contain a provision similar to 42(g)(9). Tax-exempt bonds and LIHTCs are often used together to finance residential rental projects. The purpose of this Revenue Procedure is to align the Section 142 general public use requirements with those of Section 42 and applies only to bonds that finance residential rental housing and no other exempt facilities. Application A qualified residential rental project does not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor tenants described in 42(g)(9). This procedure will apply to tax-exempt projects with or without the LIHTC.

HUD Proposed Rule Would Ban All Undocumented Immigrants from Assisted Housing

On April 17, 2019, the Department of Housing & Urban Development (HUD) sent a proposed rule to Congress that would ban any undocumented immigrant from receiving federal housing assistance. This new rule would prohibit "mixed status families" from receiving assistance in public housing, project-based rental assistance, and Housing Choice Vouchers. Under current law, housing subsidies of mixed status families are prorated so that undocumented family members do not receive any housing assistance. By providing assistance only to citizens and documented immigrants, the law permits members of mixed status families to reside together. This proposed rule will prevent undocumented immigrants from living is subsidized housing - even if they are not the primary recipients of the benefit. HUD Secretary Ben Carson has indicated that the proposed rule will ease the long waiting lists for affordable housing - a statement that has absolutely no basis in fact. The proposed rule has to be published in the Federal Register, followed by a 60-day comment period. There are many problems with this proposed rule -  not the least of which is that the explanation for the rule lacks credibility. The rule - if enacted - will disrupt existing tenant families and the idea that it will reduce lengthy waiting lists is ludicrous. Waiting lists are not long because of undocumented immigrants, but because there is not enough affordable housing for those who need it.  Contrary to HUD s claims, this rule will deny affordable housing to the citizen children of immigrants. This is not about shortening waiting lists - it is simply part of a broad administration strategy to demonize all immigrants. The cynicism of the proposed rule is obvious to anyone with an understanding of federal housing law and regulation - which does not include HUD Secretary Carson. Every household in subsidized housing must have at least one eligible citizen or legal resident. This rule will serve only to split up families - not to shorten waiting lists. There is no certainty that this proposed rule will be adopted. It will be strongly opposed by many industry groups and once it becomes clear that the premise behind the proposal is false, objections to the proposal will intensify.

2019 HOME Income Limits

HUD has published the 2019 HOME income limits. The limits will be effective on June 28, 2019. Until that date, HOME fund recipients should continue to use the 2018 HOME income limits, which were published on June 1, 2018. The CPD Income Calculator has not been updated for the 2019 income limits. A mailing list message will be sent out by HUD once the 2019 income limits have been updated in the calculator. Properties using HOME funds should notify their Participating Jurisdiction for details on using the new income limits.

Proposed Changes to LIHTC Program

     On June 4, 2019, S. 1703, "The Affordable Housing Credit Improvement Act of 2019," was introduced in the Senate. It offers some major revisions to the Low-Income Housing Tax Credit (LIHTC) program. If enacted into law, it would represent the most significant changes to the program since the law was originally enacted in 1986. Major provisions of the proposed legislation are: A 50% increase in LIHTC allocations, phased in over five years;A permanent 4% rate for acquisition costs and projects financed with tax-exempt bonds;A 30% basis boost would be permitted for rural areas and for tax-exempt bond projects;Modification of public use rules to permit LIHTC and tax-exempt bond housing for specific groups, including veterans;Permit use of the Average Income (AI) Minimum Set-aside for tax-exempt bonds;Add specific LIHTC provisions for the implementation of VAWA;Require a "cost reasonableness" component in QAPs for development costs;Increase the number of Difficult Development Areas (DDAs) that are eligible for the 30% basis boost;Repeal the population cap for Qualified Census Tracts (QCTs), opening up more areas to the 30% basis boost;Allow the inclusion of relocation expenses in eligible basis;Eliminate the basis reduction for properties using renewable energy tax incentives;Encourage more LIHTC development in Native American communities by making all such communities DDAs;Give states discretion to increase basis by up to 50% for projects targeting extremely low-income renters;Provide more flexibility for existing tenant eligibility in acquisition/rehab deals;Simplification of the ten-year rule and related party rule by limiting acquisition basis of such properties but not prohibiting the total use of credits;Allow national nonmetropolitan income limits to be used on tax-exempt bond projects;Simplification of the LIHTC student rule by adopting the HUD Independent Student rule;Clarify the ability to claim credits after a casualty loss - even for properties that are not in a federal disaster area;Replace the Right of First Refusal with a purchase option;Require that rents for units with voucher residents be no higher than LIHTC rent for properties using the AI Minimum Set-Aside or the 50% basis boost;Require that the Department of Treasury issue regulations prohibiting local approval or contribution requirements;Require that HFAs - instead to Treasury - determine when a foreclosure was arranged in order to exit an extended use agreement; andChange the name of the program to the "Affordable Housing Tax Credit." In terms of timing, if these provisions are not enacted this year, 2021 will probably be the best bet for the changes. Major tax changes are rarely passed during a Presidential election year.

Criminal Background Checks and Fair Housing

     The federal Department of Housing & Urban Development (HUD) and the Department of Justice (DOJ) are making investigations of fair housing violations in three specific areas a priority for 2019. These areas are sexual harassment, tenant-on-tenant harassment, and policies regarding criminal record checks. In the past two weeks I posted articles on the first two issues and I am completing this series with a discussion of criminal screening policies.      If you have not done so in the past couple of years, a review of your companies criminal screening policies should be a priority. It is important to ensure that your company policies relative to screening for criminal activity do not run afoul of 2016 HUD guidance in this area. It should be noted that the HUD guidance applies to all housing that is subject to the Fair Housing Act - not just HUD-assisted housing.      While communities are not prohibited from using criminal history as a factor in tenant selection, liability is possible under fair housing law if a criminal history policy, without justification, has a disparate impact on minority applicants. If your criminal screening policy considers arrest records as a reason for rejection, you should make some immediate changes. There is virtually no circumstance where an arrest record is considered by HUD to be a legitimate factor in criminal screening. The one exception to this may be a situation in which an arrest has occurred for a crime that could indicate a danger to the community and there has not yet been an adjudication. Other than this exception, HUD has stated clearly that screening based on arrest records is likely to have a discriminatory impact based on race and national origin.      Does your policy list "any felony" or felonies that occurred long ago as reasons not to rent to someone? HUD guidelines call into question the lawfulness of excluding people based on criminal convictions - without consideration of what the conviction was for or how long ago it occurred. Case Example: Jackson v. Tryon Park Apartments, Inc. January 2019      In this case, a court refused to dismiss a lawsuit filed by an applicant who claimed that a community discriminated against him on the basis of race when it denied his rental application based on a policy of automatically rejecting anyone with a felony conviction.      The applicant is African-American with a felony conviction. He met the income eligibility requirement for the apartment he applied for, had no prior evictions, and had an acceptable credit history. The community notified him that his application had been denied due to a felony on his criminal record. The applicant called twice to request an appeal, but his calls were not returned.      The applicant sued, claiming the company policy had a disparate impact based on race. The suit claims that statistics show that blanket bans based on criminal history result in the denial of housing opportunities at a disproportionate rate for African-Americans and minorities.      The community asked the court to dismiss the case and the court refused. The court stated that the statistical racial disparity the plaintiff cited was directly related to the property s alleged policy of excluding persons with a felony conviction. This case is now moving forward.      As noted, the applicant requested a hearing, and was effectively denied such a hearing by the fact that his calls were not returned. HUD guidance states that communities should offer applicants with criminal records an opportunity to explain the circumstances and what has happened in their lives since the conviction. This is similar to the "interactive process" housing providers are required to enter into before rejected a reasonable accommodation request from a disabled applicant or resident.      In another example (Hall v. Philadelphia Housing Authority, April 2019), a court dismissed claims by an applicant who accused the housing authority of race discrimination by denying him housing due to his criminal record. In this case, the person applied for housing in 2016, and the PHA required a credit check and criminal background check for all applicants. The PHA policy stated that certain factors could lead to a mandatory denial, including a homicide-related offense. Critical to this policy is that applicants were provided with the opportunity to dispute the accuracy and relevancy of the information through an informal hearing. After an interview, the PHA denied his application for two reasons: (1) a police record of a felony guilty plea to involuntary manslaughter in 1997; and (2) a landlord/tenant judgment against him for $871.      At his hearing, that applicant clarified that his conviction was for a misdemeanor, not a felony, and provided an explanation for the landlord/tenant dispute. The PHA reversed its decision on the criminal conviction and gave the applicant 30 days to provide proof that he had entered into a repayment plan with the landlord. The applicant did not meet the 30-day deadline, so the PHA upheld the denial of his application. A week later, he sent in the repayment agreement and the PHA granted his application. Eventually, he signed a lease for a unit at the PHA property.      The man then sued, accusing the PHA of race discrimination in violation of fair housing law.      Siding with the PHA, the court dismissed the case. Although the PHA initially found him ineligible for housing due to his criminal record, the PHA reversed its decision after a hearing revealed that the offense was only a misdemeanor. The PHA followed the guidance outlined by HUD and the applicant eventually was housed. This case illustrates the importance of having a policy allowing for appeals and individual assessments of specific circumstances relating to a person s criminal record.      It is also crucial that any policy relating to criminal background checks be implemented consistently, without regard to any protected characteristic. Applying it only to applicants who are members of racial or ethnic minorities, but not to white applicants, is sure to result in a fair housing violation. This point is well made in U.S. v. Dyersburg Apartments, Ltd., October 2018. In this case, the DOJ sued a Tennessee community and its property management company (MACO Management Company) for denial of an application from an African-American applicant because of his criminal record, despite approving the rental applications of two white applicants with disqualifying felony convictions.      This case began in 2012 when a man living with his ex-wife at the community disclosed a felony conviction for writing a bad check. The property s resident selection guidelines provided for rejection of applicants who had a felony conviction within the last ten years as well as any conviction for the sale, distribution, or manufacture of controlled substances or certain sexual offenses.      The manager of the community denied the application because of the policy not to rent to felons. At or about the same time, according to the DOJ complaint, at least two other applicants who were not African-American and who had criminal records in violation of the resident selection guidelines were approved for apartments at the community. Both had disclosed their felony convictions on their rental applications. The first had a conviction for felony sexual battery and was on the national sex offender database; the second pleaded guilty to felony drug charges and was on probation.      Again - consistency is critical!      Finally, as I noted in a post on May 19 of this year, a court has ruled that consumer reporting agencies must comply with the Fair Housing Act when conducting tenant screening services for landlords. In this case (Fair Housing Center, et. Al. v. CoreLogic Rental Property Solutions, LLC, March 2019), the court rejected the CoreLogic claim that the case should be dismissed because fair housing laws do not apply to its services. The court stated that the company "held itself out as a company with the knowledge and ingenuity to screen housing applicants by interpreting criminal records and specifically advertised its ability to improve Fair Housing compliance. " Basically, if a consumer reporting agency is going to make housing decisions for landlords, it must do so in accordance with fair housing requirements. The bottom line here - it is not a good idea to accept the decisions of on-line screening companies as a final decision! Final leasing decisions should be made by landlords.