News

Rural Housing Service Accepting Applications for Multifamily Preservation and Revitilization (MPR)

On August 3, 2015, the Rural Housing Service published a Notice in the Federal Register announcing the timeframe to submit applications to participate in a demonstration program to preserve and revitalize existing Rural Rental Housing (RRH) projects under Section 514, Section 515, and Section 516 of the Housing Act of 1949. Under this program, existing Section 515 Multi-Family Housing (MFH) loans and Sections 514/516 Off-Farm Labor Housing (FLH) will be restructured to ensure sufficient resources are available to preserve the ability of rental projects to provide safe and affordable housing for very low, low, or moderate income residents. Projects participating in this program will be expected to be revitalized to extend their affordable use without displacing tenants due to increased rents. No additional Agency Rental Assistance (RA) will be made available under the program.   Application deadlines for the demonstration program are: For MPR applications requesting debt deferral of eligible Section 514 or 515 loans, plus other MPR funding tools, complete applications must be received no later than 5:00 PM Eastern Time, December 1, 2015; and For any MPR applications requesting debt deferral only for eligible Section 514 or 515 loans, applications may be submitted on an ongoing basis through COB 5:00 PM Eastern Time, December 31, 2015. Fax and postage-due pre-applications will not be accepted. The address to which the applications must be sent is: Multi-Family Housing Preservation and Direct Loan Division STOP 0782 (Room 1263-S) U.S. Department of Agriculture Rural Development 1400 Independence Avenue SW Washington, DC 20250-0782   Attn: Dean Greenwalt or Abby Boggs   Additional points will be awarded to pre-applications for projects in or serving census tracts with poverty rates greater than or equal to 20 percent.   Program Description   The intent of the MPR demonstration program is to ensure that existing rental projects will continue to deliver sound affordable rental housing for 20 years, the remaining term of any Agency loan, or the remaining term of any existing Restrictive-Use Provisions (RUP) or prohibition, whichever ends later. Upon written notification to the Agency from the selected applicant of their acceptance to participate, an independent third party Capital Needs Assessment (CNA) will be conducted to determine capital needs.   One of the MPR tools to be used in this program is debt deferral for up to 20 years of the existing loan obligated prior to October 1, 1991. The cash flow from the deferred payment will be deposited to the reserve account to help meet future physical needs of the project, support new debt, or to reduce rents.   In addition to debt deferral, other MPR funding tools include: MPR Grants: Grants will be limited to non-profit borrowers only, and will be limited to the cost of correcting health and safety violations identified by the CAN. Zero Percent Loan; For Section 515 Projects, the maximum loan term is 30 years amortized over a maximum term of 50 years. For Section 514/516 projects, the loan will be amortized over a maximum term of 33 years. Soft-Second Loan: A loan with a one percent interest rate that will have its accrued interest and principal deferred to a balloon payment. The balloon payment will be due at the same time the latest maturing loan already in place at the time of closing, or the maturity date on any current loan being re-amortized as part of the restructuring, is due. MPR funds cannot be used to build community rooms, add additional parking areas, playgrounds, laundry rooms or additional new units, unless the additional units are needed for the project to meet the Section 505 five percent fully accessible requirement.   Award Information   Pre-applications selected under this Notice must be approved by the Agency no later than December 31, 2017. Applicants not approved under this Notice may apply for funding under future Notices. Applicants should be aware that unfunded applications carried over from prior Notices may receive priority consideration under this Notice.   Eligibility Requirements   Applicants must meet the following requirements: All applicants must make the required equity contribution for any new Section 515 loan. The continued ability of the borrower to provide acceptable management is also required. This will include an evaluation of any current deficiencies. Any outstanding violations or extended open findings will preclude further processing of any MPR applications associated with the borrower as well as any affiliated entity having a ten percent or more ownership interest unless there is a current, approved workout plan in place and the plan has been satisfactorily followed for a minimum of six consecutive months. For Section 515 projects, the average physical vacancy rate for the 12 months preceding August 3, 2015, can be no more than ten percent for projects with 16 or more revenue producing units and no more than 15 percent for projects with fewer than 16 revenue producing units unless an exception applies. If a project consolidation is involved, the consolidation will remain eligible as long as the average vacancy rate for each individual project meets the occupancy standard noted above. For Section 514/516 projects, rather than an average physical vacancy rate, a positive cash flow for the previous three full years of operation is required unless an exception applies. Ownership of, and ability to operate the project after the transaction is completed. An Agency approved CAN. All grant-eligible applicants must obtain a Dun and Bradstreet Data Universal Numbering System (DUNS) number and register in the Central Contractor Registration (CCR) prior to submitting a pre-application.   Pre-applications may be submitted either electronically or in hard copy. Electronic pre-applications will be recorded based on the actual date and time received in the MPR Web site mail box. Assistance for filing electronic and hard copy pre-applications can be obtained from any Rural Development State Office.   All borrowers with Section 514, 515, or 516 loans that are interested in the demonstration program should obtain a copy of the Federal Register Notice

GAO Recommends Joint HUD - IRS Oversight of LIHTC Program

Responding to a request from Senator Charles Grassley, Chairman of the Senate Judiciary Committee, the Government Accountability Office (GAO) as performed a review of the oversight and administration of the Low-Income Housing Tax Credit (LIHTC) Program. The results of the study were sent to Senator Grassley on July 15, 2015.   Based on its findings, the GAO recommends that Congress consider designating HUD as a joint administrator of the LIHTC program. According to the GAO, HUD s role should include "oversight responsibilities (such as regular monitoring of HFAs) to help address deficiencies GAO identified." The Department of Treasury agreed that HUD could be responsible for analyzing the effectiveness of LIHTC, with IRS continuing to enforce tax law. The National Council for State Housing Finance Agencies (NCSHA) disagreed with the GAO recommendations.   The GAO Findings   The opinion expressed in the GAO study is that IRS oversight of the LIHTC program has been minimal. The GAO supports this position by pointing out that since 1986, the IRS has audited only seven of the 56 Housing Finance Agencies (HFAs) that administer and oversee the program. The IRS selected the Agencies to audit based on press accounts and HFA self-reporting about lack of adherence with program compliance requirements. The first of these audits was undertaken in 2003. (The GAO report did not reveal the States that were audited). Examples of audit findings include the following: Written HFA policies conflicted with the requirements in the code or Treasury regulations; Qualified Allocation Plans (QAP) did not address all compliance requirements in the regulations or was outdated; Annual reports to the IRS had errors, such as incorrect credit allocations and overstated numbers of inspections and reviews; The HFA failed to submit form 8823 as required to report LIHTC noncompliance; and Physical inspections and tenant file reviews were not completed as required and notifications to owners were not conducted as required.   The study points out that the IRS jointly administers other programs: the Historic Rehabilitation Tax Credit with the National Park Service and the New Markets Tax Credit with the Community Development Financial Institutions Fund in the Department of the Treasury. The study states that the IRS is no well positioned to oversee the LIHTC. Since 1990, the IRS has been on GAO s high-risk list due to significant capacity challenges and incomplete monitoring of tax law enforcement.   The GAO believes that joint administration of the program with HUD would better align program responsibilities with each agency s mission and more efficiently address existing oversight challenges. Under joint oversight, the IRS would retain responsibilities consistent with administering the tax code.   Taxpayer Audits   While the IRS has conducted audits of taxpayers claiming the LIHTC, the Agency does not maintain detailed information on the audits. In 2000, the IRS had completed a review of a sample of 402 audits of LIHTC taxpayers performed from 1995-1999 (an average of about 100 audits annually) to determine a compliance level by taxpayers claiming the LIHTC and types of noncompliance. According to the IRS, the review did not find evidence of widespread noncompliance with the code. According to the IRS, the agency has completed an additional 555 audits (an average of about 40 annually) from 2001 to 2013. About 29 percent of these audits resulted in no change to the amount of credit claimed by the taxpayer or recapture of the credit. In 24 percent of cases, taxpayers agreed to make changes to the amount of credit claimed. Remaining cases either were not pursued due to the statute of limitations (23 percent), the audit was continued (10 percent), or the IRS closed the case because the taxpayer disagreed with the audit results and requested to go to court (10 percent). (The percentages total less than 100 due to rounding in the study). The study cites as a major weakness the lack of data analysis on the outcome of audits. As a result, information on commonly occurring issues and reasons for taxpayer noncompliance related to the LIHTC program is not available, making agency oversight less efficient.   Goal Setting   The study states that although the IRS is the only federal agency responsible for overseeing LIHTC program compliance, it does not set goals or assess performance for the program. The GAO believes this weakness could be alleviated by HUD participation, since HUD has traditionally played a strong oversight role in federal housing programs.   Report Conclusions   The report concludes that IRS oversight of the LIHTC program has been minimal, particularly in the review of HFA performance and compliance. The GAO states that "despite the importance of the program in the affordable rental housing market, program managers and congressional decision makers do not have sufficient information to assess the program s effectiveness."   However, the IRS still has an opportunity to enhance oversight of taxpayer compliance in the LIHTC program. This will require improvement in the current controls and procedures of the IRS relating to data entry and quality reviews.   Leveraging the experience and expertise of HUD may help offset some of the IRS s weaknesses in program oversight. Expanding HUD s role - making it a joint program administrator - could enhance LIHTC oversight, according to the GAO. Under joint administration, IRS could continue to retain certain key responsibilities consistent with administration of the tax code. But HUD would oversee program issues such as reviewing QAPs, developing goals and performance measures, and collecting LIHTC data.   Recommendation to Congress   The GAO recommendation is as follows: "To better align program goals with agency missions and improve program administration and oversight, Congress should consider designating the Department of Housing and Urban Development as a joint administrator of the program responsible for oversight."   What Will Happen Next?   This is clearly an important and perhaps far-reaching study that will greatly impact the LIHTC program going forward. Those who have been involved with the program since it s inception may shudder at the thought of increased HUD involvement, knowing how HUD tends to micromanage all programs in which it is involved. One of the strengths of the LIHTC program is that it is essentially a state housing program that uses federal tax credits as an equity generator. HUD has too often shown an inability to understand state and local housing needs. If IRS oversight is not strong enough, Congress should consider allocating additional resources to the IRS, which will enable the Agency to improve its performance.   Like many GAO studies, this one may languish and collect dust before it is given any consideration before Congress. However, with tax reform likely in the next two years, programs like the LIHTC will be given increasing scrutiny by members of Congress. This study will play a role in that scrutiny. Participants in the LIHTC program should pay close attention to Congressional actions and discussions relative to tax reform, and should begin discussing the success of the program with elected officials at all levels of government - state as well as federal. Maintaining control over housing decisions at the State level - within the context of adherence to the federal tax code - is critical for the long-term survivability of the program.

Affirmatively Furthering Fair Housing - HUD Final Rule

On July 8, 2015, the Department of Housing & Urban Development (HUD) issued a final rule on the procedures that must be followed by localities with regard to affirmatively furthering fair housing. The rule directs HUD program participants to take significant actions to integrate all zip codes in a particular locality. The rule refines the prior approach by replacing the analysis of impediments (AI) with a fair housing assessment of localities, and was issued almost immediately after the Supreme Court held that the Fair Housing Act allows "disparate impact" claims.   The rule indicates that HUD will provide states, local governments, public housing agencies, and the general public, with local and regional data on integrated and segregated living patterns, racially or ethnically concentrated areas of poverty, the location of certain publicly supported housing, access to key community assets, and disproportionate housing needs based on federally protected fair housing classes.   The approach proposed by HUD in 2013, and adopted in this final rule, with revisions, requires the use of an Assessment Tool, providing data to program participants related to certain key fair housing issues, and institutes a process in which HUD reviews the assessments, prioritization, and goal setting of program participants. While the final rule states that specific outcomes of the planning process are not mandated, HUD has shown through prior actions that if it does not agree with local decision-making, federal funds will be withheld.   Legal Authority   HUD is relying on Section 808(d) of the Fair Housing Act for legislative authority to take this action. This section of the Act requires all executive branch departments and agencies administering housing and urban development programs to administer the programs in a way that "affirmatively" furthers fair housing. This essentially means that in addition to prohibiting discrimination, the programs must encourage integration.   Major Provisions of the Rule   Replace the AI with a standardized Assessment of Fair Housing (AFH) through which program participants identify and evaluate fair housing issues, and factors contributing to fair housing issues; Improve fair housing assessment, planning, and decision making by HUD providing data that program participants must use in their assessments of fair housing; Incorporate - explicitly - fair housing planning into existing planning processes, the local consolidated plan, and the PHA Plan; Encourage and facilitate regional approaches to address fair housing issues; and Provide an opportunity for the public, including individuals historically excluded because of characteristics protected by the FHA, to provide input regarding fair housing issues, goals, priorities, and the most appropriate uses of HUD funds and other investments, through a requirement to conduct community participation as an integral part of the new assessment process.   HUD believes that the rule has the potential for substantial benefit not only for program participants but also for the communities being served. HUD also believes that the new system will provide better data and greater clarity to participants, which will improve the planning process.   This requirement is likely to pose particular challenges for cities in the Northeast and Midwest that have the highest levels of segregation. These include Detroit, Milwaukee, New York and Newark, NJ. In many of these cities, the segregation of less-wealth minority families is entrenched.   Despite the rule being final, this HUD initiative is by no means a done deal. Conservative members of Congress have denounced the plan and are moving to deny funding for its implementation. It is also possible that some localities will follow the example of Westchester County, NY, and give up federal funding rather than comply with HUDs directives. On the other hand, some local governments, like the Chicago suburb of Oak Park, have already implemented plans that are likely to comply with HUD requirements.   Local governments that receive federal funding are required to amend their plans at least once every five years. For some localities, the new rules may not need to be addressed until 2020. While the rules apply to governmental jurisdictions, it will impact the development community, since local decision-making and planning will dictate the location of affordable housing projects.

RAD - Revised Program Notice PIH-2012-32, REV-2

On June 26, 2015, HUD published a Notice in the Federal Register revising some of the rules of the Rental Assistance Demonstration (RAD) Program. HUD s original notice on the program was published on June 26, 2012. The RAD program provides the authority to convert various housing programs to long-term project-based Section 8 rental assistance. The revised Notice PIH-2012-32, REV-2 summarizes key changes made to the program. Most elements of the revised Notice are effective June 26, 2015.   Background   RAD allows for the conversion of assistance under the Public Housing, Rent Supplement (Rent Supp), Rental Assistance (RAP), and Moderate Rehabilitation (Mod Rehab) programs to long-term, renewable Section 8 assistance. RAD has two separate components: First Component: allows projects funded under the Public Housing and Mod Rehab programs to convert to long-term Section 8 rental assistance contracts. These contracts may be either Project-Based Vouchers (PBVs) or Project-Based Rental Assistance (PBRA). The RAD statute authorizes up to 185,000 units to convert under this component. Second Component: allows owners of projects funded under the Rent Supp, RAP, and Mod Rehab Programs with a contract expiration or termination occurring after October 1, 2006, to convert Tenant Protection Vouchers (TPVs) to PBVs or PBRA. There is no cap on the number of units that may be converted under this component of RAD.   Key Changes   First Component: Reflects increase in the unit cap from 60,000 to 185,000 units; Modifies the first-come, first-serve approach for selecting projects for participation in RAD in order to prioritize projects that are part of broader neighborhood revitalization and that have higher investment needs; Limits conversions under the First Component to Public Housing projects. Mod Rehab projects will now be converted only under the Second Component; Extends the time period for submission of the application for the final phase of multi-phase projects to July 1, 2018; Provides contract rents at FY 2014 rent levels for all awards made after the increase in the unit cap; Ensures that residents retain rights and protections when their Total Tenant Payment (TTP) exceeds the gross rent on the HAP Contract; Eliminates interim program milestones to streamline processing and provides additional time to submit financing plans for LIHTC transactions, to better align those deadlines with those of LIHTC providers; Identifies specific HUD nondiscrimination and equal opportunity requirements that are applicable under different conversion plans and established an up-front HUD review of these requirements for certain transactions; Stipulates when non-dwelling property and land can be removed or released from the Public Housing Program in conjunction with the conversion of assistance; Permits RAD contract rents to increase by a portion of the estimated savings in resident utility allowances (this provides an incentive for energy efficiency); Permits Section 8 assistance to "float" within certain mixed-income properties; Provides additional flexibility for voucher agencies to implement Choice-Mobility provisions in PBV conversions; Clarifies the applicability of site and neighborhood standards to new construction on the site of existing public housing; Clarifies that a PHA may operate a PBV program or HCV Program- wide waiting list and that a project owner may operate a community-wide waiting list for its PBRA projects; and Provides greater detail regarding conversions that would transfer assistance to a new site. Second Component: Provides an option for owners of Mod Rehab, Rent Supp, and RAP projects to convert to 20-year PBRA; Permits Mod Rehab SROs that were funded under the McKinney-Vento Homeless Assistance Act to convert to long-term PBV or PBRA contracts; Formalizes the applicability of Davis-Bacon wages for conversions of assistance; and Clarifies the PBV rent setting requirements for Section 236 decoupled projects.   New Waivers & Alternative Requirements   These requirements are effective as of July 6, 2015: Under-Occupied Units at Time of Conversion: Families occupying, at the time of conversion of assistance, a unit that is larger than appropriate, may remain in the unit until an appropriate-sized unit becomes available in the covered project. Under the Second Component, this alternative requirement will only apply to families who are elderly or disabled. Assistance for Families when Total Tenant Payment (TTP) Exceeds Gross Rent: PHAs and owners must continue to treat certain families in public housing that has converted assistance as assisted and charge 30 percent of adjusted gross income for rent. The families covered by this alternative requirement must have incomes high enough for their TTP to exceed the contract rent yet still remain eligible for assistance or otherwise be unable to afford market rate housing in their community; Choice-Mobility Cap for Public Housing Conversions to PBV: PHAs may, for projects that have converted assistance from Public Housing to PBV, provide one of every four turnover vouchers to households on their regular HCV waiting list instead of for Choice-Mobility vouchers; Rent Supp/RAP Contracts After Section 236 Prepayment: The original RAP or Rent Supp contract may remain in place for 60-days after repayment of a Section 236 mortgage until the PBV HAP contract is executed; Uniform Physical Condition Standards (UPCS) Inspections: All units converting assistance to PBRA must meet the Uniform Physical Condition Standards no later than the date of completion of initial repairs as indicated in the RAD conversion commitment; and Floating Units: For certain projects (Choice, Mixed Finance, and HOPE VI), HUD is allowing PBV assistance to float among unassisted units.   Participants in the RAD program should obtain and review the requirements of the revised Notice.

HUD Guidance on First Amendment Conflict with Fair Housing

HUD Guidance on First Amendment Conflict with Fair Housing   The Department of Housing & Urban Development (HUD) published Notice FHEA-2015-01 on May 26, 2015. The title of the Notice is Substantive and Procedural Limitations on Filing and Investigating Fair Housing Act Complaints That May Implicate the First Amendment.   The Notice sets forth specific restrictions regarding HUD investigation of fair housing complaints that may involve issues relating to the protections guaranteed by the First Amendment to the United States Constitution. The guidance does not prevent any individual who believes that his/her rights under the Fair Housing Act (FHA) have been violated from taking private legal action. However, HUD believes that the primacy of the First Amendment, which guarantees full and unfettered discussion in the political forum, prevents the initiation of investigations of those activities by the federal government in most cases. The Notice provides guidance to HUD staff concerning the appropriate handling of any matter involving persons, such as neighbors, who are not directly participating in real estate transactions, but who are alleged to have violated the FHA.   Unless there is force, physical harm, or a clear threat of force or physical harm to one or more individuals, public activities directed toward achieving action by a governmental entity or official - even when hostile, distasteful, and/or bigoted - can be part of a robust discussion of public issues. For this reason, HUD will not accept for filing, and will not investigate, any complaint under the FHA that involves public activities: That are directed toward achieving action by a governmental entity or official; and That do not involve force, physical harm, or a clear threat of force or physical harm to one or more individuals.   Examples of these types of "public activities" include: Distribution of fliers, pamphlets, brochures, posters, or other written materials to the public at large; Holding open community or neighborhood meetings; Writing articles or letters to the editor or making statements in a newspaper; Conducting peaceful demonstrations; Testifying at public hearings; and Communicating directly with a governmental entity concerning official governmental matters.   In certain circumstances where such activities repeatedly occur in close proximity to a captive audience, such as in front of an individual s home, a claim under the FHA may be legitimately investigated and pursued as a violation of the law. (A landmark case in this area was People Helpers Foundation v. Richmond in 1992. This Virginia case found that a course of harassment, which included neighbors organizing in front of a group home for persons with disabilities, using derogatory language to refer to the occupants, and photographing occupants and volunteers, was a possible violation of the FHA). On the other hand, an intemperate and perhaps even hostile statement made at a zoning hearing that has the effect of making persons protected by the FHA feel unwelcome in a neighborhood will not be sufficient for filing a complaint or beginning an investigation under the FHA.   The Law   Constitutional protections in the First Amendment include the free practice of religion and speech, as well as the rights of a free press. It also guarantees the right of the people peaceably to assemble and to petition the government for a redress of grievances. HUD will not engage in investigation of behavior that, although alleged to be discriminatory, is nonetheless clearly protected by the First Amendment.   When investigating complaints, HUD officials are to be particularly sensitive to any First Amendment protections and ensure that departmental actions do not unduly chill the exercise of free speech rights.   The Supreme Court has, in the civil rights context, held that certain acts of coercion, intimidation and threats of bodily harm are not protected by the First Amendment. For example, "true threats,"i.e., statements that a reasonable person would perceive as a serious expression of intent to do harm, have no First Amendment protection.   This Notice makes it clear that HUD will not pursue fair housing complaints against groups or individuals for exercising their First Amendment rights in a public setting. However, coercion, threats, or intimidation against individuals or private entities (e.g., a specific apartment community) are not protected by the First Amendment and are subject to investigation and prosecution under the Fair Housing Act.    

HUD Notice H-2015-04, Methodology for Completing a Multifamily Housing Utillity Allowance

On June 22, 2015, HUD issued Notice H-2015-04, Methodology for Completing a Multifamily Housing Utility Analysis. The Notice provides instructions to owners and management agents for completing the utility allowance required at the time of the annual or special adjustment of contract rents and when a utility rate change results in a cumulative increase of 10 percent or more from the most recently approved utility allowance.   The Notice applies to the following programs: Project-based Section 8 (including Rural Housing Section 515 projects with Section 8); Section 101 Rent Supplement; Section 202/162 PAC; Section 202 PRAC; Section 202 SPRAC; Section 811 PRAC; Project Rental Assistance (PRA); Section 236; Section 236 RAP; and Section 221(d)(3) BMIR   Owners of multifamily housing properties that receive subsidy assistance, and for which HUD provides a utility allowance, are required to adjust their properties utility allowances every year at the time of the annual and special adjustments of contract rents. Utility adjustments must be supported by a utility analysis. Other requirements of the process include: Adjustments to the utility allowance must be made regardless of whether the allowance shows an increase or a decrease; Rent adjustments must be held until the owner submits the allowance and all other required submissions. Once submitted, the rent adjustment will be retroactively implemented; Owner certifications in lieu of a utility allowance are not permitted; A minimum of 30-days notice must be provided to tenants for any utility allowance decrease; Tenants have the right to participate in and comment on a proposed utility allowance decrease; A decrease in a tenant s utility allowance does not constitute a change in total tenant payment; Multiple utility allowance adjustments are permitted during the contract year; and A utility allowance must be increased mid-year when changes in utility rates result in an increase of 10 percent or more to the allowance from the most recently approved utility allowance.   The Notice includes a sample tenant consent form, a directive requiring tenants to provide utility data upon request, and an Excel spreadsheet to aid in the allowance calculation.   The methodology dictated by the Notice is premised on calculating average utility consumption based on actual tenant consumption by unit size. It is designed to provide an estimate of reasonable consumption by an energy-conservative household of modest circumstances.   Methodology   Property owners must establish baseline utility allowances for each of their bedroom sizes once every third year. For the two years after the baseline is established, owners and agents (O/As) have the option to perform a "factor-based" utility allowance.   The Baseline Analysis   To perform a baseline analysis, the following steps must be taken: Request utility data from either the utility company or the tenant household for at least the number of units determined by the sample size methodology (discussed later). This must be done for each bedroom size at the property. If the buildings are not identical, the sampling must be done for each bedroom size for each building. Units are excluded from the sample if it: Is receiving an increased utility allowance due to a reasonable accommodation; Has been vacant for two or more months (at least ten months occupancy is required for the sample); or Is receiving a flat utility rate as part of a low-income rate assistance utility program. Determine the average utility cost for each bedroom size. The highest or lowest utility cost household may not be removed from the sample. Recommend this amount to the Contract Administrator (CA) for approval.   A sample format for submissions in contained as Attachment A to the Notice, as is a sample tenant release form.   Properties with contract anniversary dates within 180-days of publication of the Notice (12/19/15) can choose to perform the upcoming annual utility analysis using either the existing methodology or the method outlined in the Notice. If the existing methodology is used, a baseline analysis must be used at the next contract anniversary date. Properties with contract anniversary dates after December 19, 2015, must perform the upcoming utility analysis using the methodology outlined in the Notice.   Factor-Based Utility Analysis   For the two-years after the baseline allowance is completed, the utility allowance amounts for each bedroom size and each utility at the property can be adjusted by a state-specific increase factor, the "Utility Allowance Factor (UAF)," provided by HUD, in lieu of a baseline utility analysis. The UAF may be found on the HUDUser website.   O/As should compare the adjusted utility allowance to their paid utilities over the previous 12-months. If, in the O/As determination, the results indicate a significant disparity between the two, the O/A should complete a baseline analysis to help ensure that the allowances provided are accurate. This part of the Notice appears to indicate that while the factor-based allowance may be used, owners are expected to obtain actual usage information every year.   Utility Allowance Changes Outside of the Contract Rent Adjustment Schedule   Owners are required to submit documentation and request for an increase in utility allowances when changes in utility rates result in a cumulative increase in utility allowances of 10 percent or more from the most recently approved allowance. When the owner requests an increase in an allowance, the owner must submit either of the following as evidence of the rate change: Utility bills from the month prior to the utility rate change and the first month after the utility rate change; or Verification of the increase from the utility provider. Only when a rate change results in a change in the full utility allowance (not just one utility) of 10 percent or more must the owner request the increase.   Utility Allowance Decreases   An owner must follow the 24 CFR Part 245.405(a) and 245.410 requirements relative to tenant notice whenever there is a decrease in the allowance.   If the utility allowance decrease that results from the initial application of this Notice would exceed 15 percent of the most recent utility allowance and that decrease is equal to or greater than $10, the decrease must be phased in. No decrease in any one year may be greater than 15%. If the decrease is less than $10, there will be no phase-in of the decrease.   Utility Allowance Sample Size   The sample size has been set by HUD based on the number of units of each bedroom size. The Notice outlines the required sample sizes, which range from all units being included when the number of units per bedroom size is 1 -20, to 29 units if the number of units per bedroom size is 389 or more. The Notice provides the specifics of the sample size.   Allowances for New Construction or Substantial Rehabilitation   Properties undergoing new construction or substantial rehabilitation may establish initial utility allowances based on the methodology outlined by the IRS for the establishment of allowances for the Low-Income Housing Tax Credit program. The analysis must be completed at underwriting through an energy consumption model, including a State HFA approved utility allowance calculator. These estimates must be calculated by either (1) a properly licensed engineer or (2) a qualified professional approved by HUD. The owner must furnish a copy of the estimates derived from the energy consumption model to HUD or the CA and make copies available to all tenants in the building.   When the property is occupied and the owner can obtain 12 months of actual consumption data, the owner must establish a baseline estimate using the methodology outlined in the Notice.   Requirements for Tenant Households   An owner may require a tenant to sign a release for utility data in certain circumstances, such a when a utility company requires a tenant release prior to providing data. If a tenant release is necessary, the owner will request and the tenant is required to sign a release (this is a requirement under the HUD Model Lease for Subsidized Projects). A sample tenant utility release form is included in the HUD Notice.   Households are also required to provide utility data and documentation if requested, and the request does not have to correspond to the household s recertification.   Households are required to disclose whether they are receiving utility assistance from sources other than HUD. O/As must ask this question at a tenant s annual recertification of income and family composition, because these assistance payments are a source of income that are included in the determination of annual income and the calculation of tenant rent.   Tenants who fail to comply with these requirements are in violation of the lease and are subject to termination of tenancy.   This is an important Notice and guidance for owners involved in any of the programs noted above, and all affected owners and management agents should obtain a copy of the Notice.

Supreme Court Decision on Disparate Impact, June 25, 2015

Supreme Court Rules on Disparate Impact   On June 25, 2015, the United States Supreme Court issued a landmark ruling on Texas Department of Housing & Community Affairs v. The Inclusive Community Project, Inc. The ruling found that housing policies could be deemed discriminatory based on "disparate impact." This means that plaintiffs can prove discrimination in the provision of housing by showing that the "effect" of a housing policy is discriminatory, even when there is no "intent" to discriminate.   The Court ruled that disparate-impact liability is permitted based on the Law s text, the Law s purpose, and decades of acceptance by every Federal district court and Congress.   While affirming the use of disparate impact as a fair housing cause of action, the Court also made it clear that such use is not unlimited. Reasonable housing policies and practices should not be found discriminatory if such policies or practices achieve a legitimate interest or business necessity. Plaintiffs bear the burden of demonstrating a "robust causality requirement" when accusing a housing provider of disparate impact discrimination. A statistical disparity alone is not enough to demonstrate discrimination unless there is evidence that the policies or practices of the defendant caused the disparity. Defendants also may not be held liable if federal law or local health and safety codes require their practices.   Issues   This case essentially turned on a single issue: Does Title VIII (the Fair Housing Act) of the Civil Rights Act of 1968 allow claims to be brought for "unintentional" acts of discrimination? The Fair Housing Act (FHA) clearly prohibits intentional discrimination (disparate intent). The Texas Department of Housing & Community Affairs (TDHCA) took the position that since the FHA does not specifically provide protection against unintentional discrimination, only intentional acts are subject to complaint and enforcement action.   The Holding   The Court held that disparate impact claims are cognizable under the FHA and that policies that have the "effect" of discrimination may be challenged under the FHA. However, the Court also placed limits regarding when a disparate-impact claim may be made.     Justice Kennedy delivered the opinion of the Court stating " The underlying dispute in this case concerns where housing for low-income persons should be constructed in Dallas, Texas - that is, whether the housing should be built in the inner city or in the suburbs."   The Plaintiff s (ICP) position was that the policies of TDHCA limit the ability of low-income minorities to live in non-minority areas, thus having a disparate-impact based on race. It is important to note that the Court did not rule on the specifics of this case - only if the state s policies could be challenged under the disparate-impact principle.   In it s holding, the Court relied not only on the language of the FHA itself, but also on two anti-discrimination laws that preceded the Fair Housing act. These are Title VII of the civil Rights Act of 1964 and The Age Discrimination in Employment Act of 1967 (ADEA). Both statutes authorize disparate-impact claims. Two Court decided cases involving these two laws found that " antidiscrimination laws should be construed to encompass disparate-impact claims when their text refers to the consequences of actions and not just to the mindset of actors, and where that interpretation is consistent with statutory purpose."   The FHA itself states that it is unlawful to "refuse to sell or rent or otherwise make unavailable (emphasis added) or deny, a dwelling to a person because of race" or other protected characteristic. The Court gave great weight to the phrase "otherwise make unavailable," stating that it refers to the "consequences" of an action rather than the actor s intent. The Court also states that the introductory word "otherwise" signals a shift in emphasis from an actor s intent to the consequences of an action.   The decision stresses the fact that the 1988 amendments to the FHA indicate that Congress was accepting of the Appeals Courts recognition of disparate impact as a permitted element of the law. Prior to 1988, all nine Courts of Appeals had concluded that the FHA encompassed disparate-impact claims. Had Congress not approved of the use of disparate-impact, the 1988 law would have included language eliminating such use.   Limitations on Disparate-Impact   The Court decision places limits on the use of disparate-impact, although no specific limits were enumerated in the decision. It is clear from the decision that agencies and developers are to be given leeway to explain the valid interest their policies serve. For example, credit requirements and criminal screening may affect one race more than others, but the use of such screening can be shown to be valid for the purpose of protecting property and investments. A disparate-impact claim cannot rely on statistical disparities only in showing a discriminatory effect. A key statement in the decision is that "courts should avoid interpreting disparate-impact liability to be so expansive as to inject racial considerations into every housing decision." To the extent possible, corrections to disparate-impact should be "race-neutral." This part of the decision may cause HUD to reexamine its current effort at desegregation of every zip code through the threat of withholding federal funds for localities that do not comply.   The Court went to great lengths in the decision to express its concern that disparate-impact complaints not be used in an abusive way. As stated in the decision, "If the specter of disparate-impact litigation causes private developers to no longer construct or renovate housing units for low-income individuals, then the FHA would have undermined its own purpose as well as the free-market system.   In light of the wording in the FHA and overwhelming precedent, this decision was not as unexpected as some members of the housing industry anticipated. The opinion itself is very well crafted, and the duality of the opinion (i.e., both permitting disparate-impact claims and limiting their use to discriminatory effects that are clear and serve no valid interests), means there will be almost no discernible impact on the multi-family industry. The decision does not permit the use of a new theory in the law; disparate-impact claims have been made for decades. The clear direction provided by the Court that disparate-impact may not be used to override legitimate business and local interests is a plus for the real estate industry.        

Revision to RD Section 538 Guaranteed Loan Program Replacement Reserve Requirements

The Rural Housing Service published a Notice in the Federal Register on June 18, 2015, amending its regulation to change the requirements of the reserve account for direct Multifamily Housing (MFH) loans. The purpose of the Notice is to address the reserve account requirement of the Agency to countersign with the borrower when a Section 538 guaranteed loan is involved, and to also clarify that reserve account funds cannot be used to pay for fees associated with the Section 538 guaranteed loan program. This final rule will be effective August 17, 2015. The current requirement [7 CFR 3560.306(e)(2)] states that reserve accounts require the Agency to countersign with the borrower on all withdrawals. The Section 538 Guaranteed Rural Rental Housing (GRRH) Program often provides funding to an existing direct MFH loan property. The program regulation [7 CFR 3565.402(a)] requires that all property reserve accounts be held by the lender (not the owner), which eliminates the unauthorized use of these funds by the borrower since the borrower does not have access to the funds. This creates conflict between the two sets of regulation, pitting the requirement for the Agency to countersign for funds against the requirement that lenders have unfettered control of funds under the 538 program. In order to meet the requirements of many of the 538 lenders, the reserve accounts cannot be countersigned with any other party. This rule relieves the Agency of its countersignature responsibility for properties with Section 538 funding, but leaves the requirement in place for direct MFH loans (e.g., Section 515 Program). In order to ensure protection of the Agency's interests, the lender will still be required to obtain prior Agency approval before disbursing funds from the account. The final rule also clarifies that reserve account funds cannot be used to pay fees associated with the loan guarantee. Lenders have been using the replacement reserve account to pay fees associated with the loan guarantee, i.e., the annual renewal fee. These fees are considered a project expense and must be paid from the operating account, not the replacement reserve account. Borrowers who want additional information on this change should contact Tammy Daniels in the Multi-Family Housing Guaranteed Loan Division at the Rural Housing Service. Her phone number is 202-720-0021.