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Troubled Properties: Section 8 Disqualification and Disposition of Multifamily HousingDescription HUD multifamily properties may be at risk of conversion to market rate or demolition when the property is in poor condition, or where the owner has other properties in extremely poor condition or has committed serious program violations. For properties with a Section 8 contract, this risk may occur at or about the time of contract expiration, or during contract term. The Section 8 rents of these properties may be at any level, but usually exceed true market "street rents". These properties risk (1) owner default on the mortgage and termination of restrictions or subsidy through HUD’s foreclosure and "property disposition" process and (2) disqualification or termination from the Section 8 program, usually a refusal by HUD to renew the Section 8 contract. Foreclosure and Property Disposition. The attached chart outlines the process after an owner of a HUD insured property defaults upon their mortgage. After default, HUD takes an assignment of the mortgage from the original lender in exchange for an insurance payment and becomes the lender for the project. HUD has broad discretion to act to make repairs, take possession and operate the property, terminate or extend the Section 8 contract, and force a change in ownership, where major defaults persist. If HUD is the high bidder at the foreclosure sale, HUD takes title to the property and then tries to sell it through the property disposition program. Laws and regulations cited herein provide a framework to preserve the low-income character of the housing through the foreclosure / disposition process. However, since 1995 Congress has also given HUD "flexible" authority, which HUD has typically used to quickly sell the property with few if any use restrictions or subsidies to preserve it, in order reduce its obligation to subsidized and regulate these projects. HUD may take a number of actions which could be harmful to tenants, including: terminate the Section 8 contract upon foreclosure; sell the project for a nominal amount to a local government interested in redevelopment or demolition of the project; fail to place conditions on a foreclosure sale for competent ownership and management, repairs or continued low income use; bid low at the foreclosure sale, thus allowing speculative developers to acquire the project. Disqualification. There are a few ways a property or owner may be disqualified from Section 8: (1) general "suspension or debarment" from all HUD programs (24 C.F.R. Part 24), (2) violation of the terms of the Section 8 Housing Assistance Payments (HAP) contract, or (3) at the expiration of the term of the contract, HUD or the Participating Administrative Entity (PAE) may "disqualify" the owner or property by refusing to offer a renewal contract to an otherwise eligible and willing owner. This third option can also occur simply because HUD or the PAE finds the cost of rehabilitation to be "too expensive." Renewal of the Section 8 contract and mortgage restructuring under "Mark to Market" may be an important part of a preservation solution for these properties, although the PAE may require transfer to new ownership. The law requires HUD to develop procedures to facilitate the transfer of such properties preferably to tenant-endorsed nonprofit or public owners (MAHRAA §516(e)), with a renewal of the Section 8 contract, but HUD’s rule requires little more than a notice from an owner who is facing imminent disqualification and intends to sell the property (24 C.F.R. § 401.480) In the event of disqualification, tenants will usually receive a short-term notice from HUD or a PHA that the building is being disqualified and they must move, and that they should come in for a Voucher certification appointment. The problems of the building and its impact on the community will rarely be solved by a disqualification alone. Disqualification or termination from the Section 8 program will often precipitate a default and foreclosure on any HUD-insured mortgage, as mentioned above. Statutes Multifamily Housing Property Disposition Reform Act of 1994, Pub. L. No. 103-233, 108 Stat. 342 (1994), primarily codified at 12 U.S.C. § 1701z-11 (West 2001) . "Flexible Authority" Statute, 12 U.S.C. §1715z-11a; Pub. L. No. 104-204, § 204, 110 Stat. 2873, 2894 (Sept. 26, 1996) (adding 12 U.S.C. §1715z-11a effective FY ‘97 to allow HUD to dispose of units or sell the mortgages without minimal protections in 1994 law for planning, management or subsidy requirements); Up-Front Grant Authority, Pub. L. No. 105-65, § 213, 111 Stat. 1366 (Oct. 27, 1997) (amending 12 U.S.C. §1715z-11a to authorize HUD’s use of insurance funds for rehab grants and loans in FY ‘97 and ‘98), Pub. L. No. 105-276, §206 112 Stat. 2484 (Oct. 21, 1998) (extended for FY ‘99), Pub. L. No. 106-377, § 204 114 Stat. 1441A–24 (Oct. 27, 2000) (made permanent HUD’s authority to insurance funds for rehab). Mark to Market Disqualifications. MAHRAA § 516; Pub. L. No. 105-65, §516(e), 111 Stat. 1343, 1400 (1997) (MAHRAA statute for "Mark to Market"- eligible properties disqualified due to owner violations, directs HUD to develop procedures to encourage the transfer of disqualified properties to tenant-endorsed community-based non-profits, see Operating Procedures Guide (OPG) Section 3-8 (Sale or Transfer of Property), Appendix C (Qualified Non-Profit Purchasers)); Pub. L. No. 106-74, §531, 113 Stat. 1110 (1999) (amending MAHRAA §524(a)(2), for other properties); and Pub. L. No. 105-65, § 516(d), 111 Stat. 1400 (1997) (tenant-based assistance for tenants in disqualified properties). Pub. L. No. 106-554, Appendix G, § 141, 114 Stat. 2763, 2763A–614-617 (Dec. 21, 2000), (amending 1715z-11a to require transfer of HUD-owned properties to state or local government where the project is unoccupied there are or more than 25% severely defective units). Pub. L. No. 107-73, § 212 (Nov. 26, 2001) ("Bond Amendment" requires renewal of Sec. 8 contract at foreclosure or PD sale for projects primarily occupied by elderly and disabled, FY ‘02); Pub. L. No. 106-377, § 233, 114 Stat. 1441A-34 (Oct. 27, 2000) ("Bond Amendment" for FY ‘01). Regulations 24 C.F.R. Part 24, Disqualification from HUD’s programs generally. 24 C.F.R. Part 290, Disposition of Multifamily Projects and Sale of HUD-Held Multifamily Mortgages. Note HUD’s "flexible" regulatory provision concerning "methods of disposition" contained in Section 290.1, adopted by 64 Fed. Reg. 72412 (Dec. 27, 1999). 24 C.F.R. § 401.480, Transfer or sale of properties in Mark to Market restructuring, see also 24 C.F.R. §§ 401.2, 401.403, 401.602, and 401.645.
HUD Notices and Other Administrative Guidance HUD, Section 8 Renewal Policy Guide (Jan. 19, 2001) The document posted here is a version of the Guide as amended through November 2001. Check HUD's web site for any revisions. Operating Procedures Guide (OPG) for properties eligible for Mark to Market Restructuring. Document posted here contains the text of Chapters 1-12, current as of June 10, 2002. For revisions, see check OMHAR’s web site. See Chapter 3, Section 8 regarding sale or transfer of properties, and Appendix C for Qualified Non-Profit Purchasers. Guide, Disposition of Multifamily Projects and Sale of HUD-Held Multifamily Mortgages, 61 Fed. Reg. 11,691 (Mar. 21, 1996) (included with the promulgation of 24 C.F.R. Part 290, only appears in the Federal Register and not codified with the regulations). HUD Handbook 4315.1, Multifamily Property Disposition Management (2/17/71 through CHG-3/29/94), available at www.hudclips.org. Cases Baptiste v. Jackson (E.D.N.Y., filed 2004)Plaintiffs, residents of a four-building project-based Section 8 complex located in Bedford-Stuyvesant with a total of 75 units, seek injunctions to:
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No. JFM-99-3250 (D. Md. filed 1999). (Dunhaven Apts., Baltimore Co., Md.) Current residents of Chicago project-based Section 8 property seek to prevent HUD from terminating Section 8 contract for 1,240 unit property after foreclosure. File includes:
(Carey Apartments) City of St. Paul, MN, purchased then proposed demolition of a project with mortgage formerly HUD-held but sold in 1994, after prepayment of 221(d)(3) BMIR mortgage; claims for violation of Section 250, 12 USC 1715z-15, 12 U.S.C. § 1701z-11(k)(1) (permitting mortgage sales by HUD only "on terms at least as advantageous" to tenants as the terms when HUD-held), and Fair Housing Act "affirmatively furthering duty". District court opinion granted defendants’ motion to dismiss due to lack of standing, 199 F.R.D. 327 (D.Minn., 2001.). The project was demolished after stay pending appeal denied by 8th Cir.; appeal dismissed as moot. Davis v. Kennedy Homes Ltd. PartnershipNo. 1:04cv52 MMP/AK (N.D. Fla. filed 2004). (Kennedy Homes, Gainesville, FL) Tenants’ challenge to HUD and owner’s proposed termination of project-based Section 8 contract and closure of HUD-subsidized Section 236 property as contrary to federal statutes and project’s use agreement, Uniform Relocation Act, due process, fair housing act, and APA. Plaintiffs were displaced former tenants that were denied vouchers by PHA’s local screening policy, whose primary goal was to preserve the property through extension of the Section 8 contract, rehabilitation, and transfer to nonprofit ownership. Although defendants agreed to extend Section 8 contract temporarily to forestall preliminary injunction hearing, claims against HUD ultimately settled for modest cash payments to named plaintiffs. Claims against private owner dismissed without prejudice. Dean v. Martinez No. CCB 03-1381 (D.Md. filed 2003).(Upland Apts., Baltimore, MD) Challenge to HUD's proposal to foreclose on 980-unit largely vacant HUD-subsidized property (approx. 50% project-based Section 8) on large site and acquire title for re-transfer to City as part of mixed-income redevelopment plan that includes no project-based Section 8. Defendants were both HUD and the City. Claims included alleged procedural and substantive violations of property disposition statute, URA and relocation regulations, fair housing laws, Section 504 of the Rehbilitation Act, and state law. Court ruled that HUD violated property disposition statute and remanded decision to HUD. File includes:
Ellison Apartments never filed (Red Bluff, CA) Draft complaint challenging HUD's proposed foreclosure sale of a § 236 property without a plan for adequate repairs and subsidies to permit preservation by nonprofit; claims include violation of the National Housing Act, 12 U.S.C. § 1701, et seq., the Multifamily Housing Property Disposition Reform Act of 1994, 12 U.S.C. §1701z-11, and the Fair Housing Act, 42 U.S.C. § 3601 et seq. Case was not filed due to settlement whereby HUD bid the full debt at auction, acquired the property, and resold to a tenant association supported by a non-profit for rehabilitation and preservation. Forest v. MartinezNo. 02-4439 JAG (D.N.J. pending 2004) (Brick Towers, Newark, NJ) File includes:
GP-UHAB Hous. Devel. Fund Corp. v. Jackson No. CV-05-4830 (CPS) (E.D.N.Y. filed 2005) Challenge to HUD's temination of Section 8 contract through foreclosure and transfer process as violation of Bond Amendment and Fair Housing Act. Ultimately, court rejected nonprofit owner's claim due to Flexible Authority statute, but found that HUD had duty to continue to pay subsidies to owner until tenants actually received vouchers. Guity v. Martinez S.D.N.Y. No. 03 Civ. 6266 (LAP) (filed 2003; memorandum opinion May 19, 2004; not appealed). (Pueblo de Mayaguez, Bronx, NY) Tenants’ challenge to HUD’s foreclosure of HUD-held multifamily mortgage as contrary to federal property disposition statute, 12 U.S.C. Sec. 1701z-11, and regulations, 24 C.F.R. part 290, APA, Fair Housing Act, due process, and purported contract with City. Court denied TRO and dismissed all claims, finding that HUD could elect to pursue alternative foreclosure procedure provided by federal Multifamily Mortgage Foreclosure Act. Decision not appealed. File includes:
Statutory challenge to HUD's proposed foreclosure sale of Barbara Jean Wright Courts, a troubled property in gentrifying neighborhood, no Fair Housing claims; HUD agreed to delay the foreclosure and the case settled through eventual sale to owner who preserved affordability and rehabilitated the property. Massie v. HUD No. 06-1004, slip. op. (W.D. Pa. 2007) The cooperative Third East Hills Park, Inc. owned a Federally-assisted residential housing development in Pittsburgh. Shareholders in the cooperative seek to enjoin HUD from foreclosing the property and transferring ownership.
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Morris v. Jackson No. 04 Civ. 1913 (ARR) (E.D.N.Y. filed 2004) Challenge to owners attempt to prepay, and HUD's proposed acceptance of prepayment, accelerated balance of note on troubled property on eve of mortgage foreclosure. After issuance of TRO, HUD agreed to re-notice foreclosure on additional grounds, and seek acquisition of title for re-transfer to City and eventual nonprofit owner. Property ultimately sold to nonprofit for eventual coop conversion, but not without additional issues with HUD concerning form and flow of subsidy (GP-UHAB case). Rutledge v. Jackson No. _________ (E.D. Mich., filed Dec. 2005) Challenge to proposed foreclosure sale of HUD-subsidized project with partial project-based Section 8 to unqualified purchaser, asserting and APA claim for violation of the federal property disposition statute and Section 219 of FY 2004 Appropriations Act.
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Challenge to PHA's denial of voucher assistance to certain tenants of property where project-based Section 8 contract was terminated by HUD for owner breach. PHA had denied tenants for various reasons, primarily alleged prior criminal activity during past decade, despite tenancies in good standing. Upon demand, PHA provided vouchers for most tenants initially denied, except two plaintiffs. Claims based on federal statutes including the enhanced voucher statute, 42 U.S.C. Sec. 1437f(t), and MAHRAA Sec. 524(d), as well as federal regulations. Case was filed in state court, where TRO was obtained after hearing and decision. Prior to PI hearing, PHA then removed case to federal court, which issued an opinion and oder denying PI after hearing. Thornton v. U.S. Dep’t of HUD No. 99C-7435 (N.D. Ill., filed 1999) Statutory and Fair Housing claims regarding disposition of two troubled HUD-owned projects in racially integrated neighborhood; HUD plan to sell to local nonprofit for condo conversion. Hooper v. Park Place Apts., No. C-1-99-836 (S.D. Ohio, Suppl. Complaint filed Dec. 20, 2000) (challenge to owner and HUD’s failure to maintain property and preserve Section 8 contract through transfer to new owner in lieu of foreclosure on statutory, contract and state law grounds) Mays v. Cuomo, No. C-1-96-929 (S.D. Ohio, order May 21, 1998) (S.D. Ohio, order May 21, 1998) (for lack of subject matter jurisdiction, rejecting APA statutory challenge to HUD’s proposed disposition of three HUD-owned properties to local PHA with no low-income use restrictions or project-based Section 8, finding "deregulation" statute, 12 U.S.C. §1715z-11a, eliminates any "law to apply") Robinson v. Secretary of HUD, No. 99-______ (N.D. Tex., filed 1999) (challenging HUD's proposed sale of HUD-owned Oak Hollow apartments for demolition as violation of applicable civil rights and Fair Housing laws) Yarbrough v. Cuomo, No. 98-933 (D. Minn, filed 1998) (challenging prepayment of HUD held-mortgage on troubled property as violation of 12 U.S.C. 1701z-11 and Fair Housing laws) Articles California Coalition for Rural Housing memo "Ellison Apartments Saved!" [file attached] "Brick Towers Tenants Win a Reprieve from Judge," New Jersey Star-Ledger, Sept. 18, 2002.
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