As indicated earlier this week, HUD is seeking comments to inform revisions to its Affirmatively Furthering Fair Housing rule. We have been waiting for official publication of the advance notice of proposed rulemaking (ANPR) in the Federal Register to determine when these comments will be due. HUD today published the ANPR.  We now know comments are due October 15, 2018.

Yesterday, HUD announced that it intends to amend its 2015 regulations on affirmatively furthering fair housing, or AFFH. HUD is giving the public 60 days from publication of its advance notice of proposed rulemaking to provide comments on the current AFFH rule.  HUD seeks comments that will help it revise the rule to:

  • “Minimize regulatory burden” while more effectively fulfilling the AFFH requirements
  • Focus on “positive results” rather than “analysis of community characteristics”
  • Allow “greater local control and innovation”
  • Increase housing choice, including greater supply
  • “More efficiently use HUD resources”

This announcement comes after HUD first extended the deadlines for, then withdrew, its AFFH Local Government Assessment Tool, which had been the subject of some controversy related to the reporting burden associated with the tool and other criticisms.  The Local Government Assessment Tool is to be used by cities and other entities that receive Community Development Block Grants, HOME Investment Partnerships Program, Emergency Solutions Grants, or Housing Opportunities for Persons With AIDS formula funding from HUD.  HUD’s announcement also comes while HUD is being sued by advocacy groups related to these actions regarding the assessment tool.

The 2015 AFFH rule contemplated that public housing authorities, states and insular areas would also use a different tool to conduct assessments of fair housing, but those tools have not yet been finalized.

These actions by HUD do not eliminate the Fair Housing Act’s requirements for recipients of HUD funds to affirmatively further fair housing. Indeed, most recipients certify that they further fair housing in connection with various applications for HUD funds and other HUD submissions. Instead, HUD’s actions return most entities to the requirements in effect prior to the 2015 rule, in which they must conduct an analysis of impediments rather than use an assessment tool.

We are working on comments on the AFFH rule, and encourage any entities impacted by the AFFH rule to consider commenting on it.

Ballard Spahr lawyers, Molly Bryson, Doug Fox, Wendi Kotzen and Linda Schakel, recently offered a  presentation regarding the Opportunity Zones established as part of the Tax Cuts and Jobs Act .  As a new program established to encourage capital investment in the over 8,700 Opportunity Zones selected by each of the states, District of Columbia, and U.S. possessions, this new program has the potential to provide investors in Opportunity Funds with deferral of tax on gains rolled over into an Opportunity Fund and potential elimination of tax on the appreciation recognized on the investment in the Opportunity Fund. Opportunity Funds and their investors will be looking to make investments in businesses and property located in Opportunity Zones. Investments in Opportunity Zones could be used in conjunction with the low-income housing tax credit and help bolster affordable housing and community development projects in these neighborhoods.

The linked materials and the session recording provide steps you can take to benefit from this new federal tax program, including:

·        Establishing and qualifying an Opportunity Fund

·        Investing gains into Opportunity Funds

·        Obtaining the maximum benefit of investing in Opportunity Funds

·        Structuring Opportunity Fund investments

·        Locating designated Opportunity Zones

·        Positioning your business or property to qualify as eligible for investment capital from an Opportunity Fund

·        Combining the benefits of an Opportunity Zone with other federal tax programs, such as Low Income Housing Tax Credits (LIHTC), Historic Tax Credits, and New Markets Tax Credits.

Should you have a project that you think could benefit from Opportunity Zones investments or are seeking ways to facilitate investments, please reach out to members of the Ballard Spahr team for guidance and help brainstorming around issues and questions.

On June 15, 2018, the Massachusetts Supreme Judicial Court affirmed a grant of summary judgment by the Massachusetts Superior Court to a nonprofit developer allowing it to exercise its Section 42 right of first refusal (“ROFR”) to acquire an affordable housing project financed with Low Income Housing Tax Credits (“LIHTC”) despite the investor’s claims that the ROFR could not be exercised until a third party bona fide offer was received and accepted by the LIHTC partnership with the approval of the investor and that the exercise of the ROFR in this instance constituted a breach of fiduciary duties and could not be enforced.

In Homeowner’s Rehab Inc. v. Related Corporate V SLP, L.P. (SJC 12441) (Mass. 2018), the court resolved three discrete issues: (1) is a bona fide, third party offer required to trigger the right of first refusal; (2) must the owner of the property accept the third party offer in order to enable the nonprofit entity to exercise the ROFR; and (3) is the general partner of the property owner permitted to accept the third party offer without the consent of the investor. Each of these issues will have implications on the reading of partnership agreements and rights of first refusal in LIHTC housing transactions. It will be interesting to observe whether this Massachusetts case is the beginning of a trend and how the findings here will impact LIHTC partnership negotiations going forward.

First, the court held that an offer need not be “bona fide” in the common law sense to trigger a ROFR. In making this determination, the court provided that the ROFR could not be read in isolation and had to be construed in connection with the partnership agreement, the intent of the parties, the purpose behind the LIHTC program and Section 42(i)(7) of the Internal Revenue Code (“Section 42(i)(7)”). As stated in the preamble of the ROFR in question, the ROFR was granted “in accordance with Section 42(i)(7).” The partnership agreement and the ROFR in question were silent on the specific issue of whether the ROFR can only be triggered by a “bona-fide” offer.

In considering the purpose behind Section 42(i)(7), the court considered the legislative history of Section 42(i)(7) and interpreted it to confirm “that it was intended to facilitate the inexpensive transfer of properties to nonprofit organizations.” See Homeowner’s Rehab Inc. v. Related Corporate V SLP, L.P. (SJC 12441) (Mass. 2018), at 26. The court reasoned that because the ROFR here was granted under Section 42(i)(7) and Section 42(i)(7) allows the nonprofit organization to purchase the property at a price that is often below-market value and less than the price offered by the third-party, a determination that a “bona fide” offer was needed would be inconsistent with the statutory mechanism of Section 42(i)(7). However, the court noted that the third party offer must be “an enforceable offer from the third party.” See id. at 31.

The court also agreed with the lower court that there is nothing in the agreements that bar the general partner from soliciting an offer.

Second, the court concluded the ROFR could not be exercised by the nonprofit developer unless the owner of the property decides to accept an offer from the third party. In making this determination, the court again relied on the terms of the ROFR itself and the legislative intent of the drafters of Section 42(i)(7).

The terms of the ROFR here stated that before the ROFR could be exercised, the partnership must deliver notice of an offer to purchase from a third party to the nonprofit developer. This notice was required to include whether the partnership was willing to accept the offer. In the lower court, the judge interpreted this to mean the partnership did not have to decide to accept the offer in order to trigger the ROFR. Here, the court disagreed stating that the lower court’s interpretation went against the common law distinction between “right of first refusal” and “option to purchase” and the legislative intent of Section 42(i)(7). Congress intended there be a right of first refusal which cannot be exercised until the owner decides to sell. Under the partnership agreement, the court noted that the general partner had the power to decide to sell but the court distinguished that power to accept a third party offer, which triggered the ROFR, from the consummation of the sale which required the limited partner’s consent. The court noted that the decision by the owner to accept the third party offer need not be communicated to the third party and does not constitute an acceptance of the offer.

Third, the court held that the general partner is authorized to trigger the nonprofit developer’s ROFR by soliciting an offer from a third party and, upon receipt of the offer, issuing a disposition notice if the general partner has decided, on behalf of the partnership, to accept the offer. The court stated that “the partnership could not consummate a sale to a third party without the consent of the special limited partner, but that does not mean that the special limited partner must consent to the terms of an offer before the disposition notice can be issued.” See id. at 36.

The court stated that if the limited partner or special limited partner’s consent were needed before the nonprofit developer could exercise its ROFR, “one would expect that the limited partners would withhold their consent unless they were willing to sell the property interest at the § 42 price.” See id. at 33.  If this were the case, then according to the court, the limited partner “would have no reason to wait for a third-party offer to trigger the right of first refusal; they could simply sell to the nonprofit developer at that price.” See id. at 34. The court’s determination was made in part to avoid denying the nonprofit developer the opportunity to acquire the property at the Section 42 price in situations where the limited partner is unwilling to trigger the ROFR.

The limited partner contended that this determination would be contrary to the language of the agreements, but the court disagreed. According to the court, there are only a few instances in which the partnership agreement identifies general partner actions that need to be consented to by the special limited partner. The court states that “section 5.5.B(iv) prohibits the general partner from ‘sell[ing] all or any portion of the property,’ except with the Consent of the Special Limited Partner.” See id. at 35. The court further states that “this prohibition is ‘subject to the provisions contained in Section 5.4,’ which grant the general partner the authority to sell ‘all or substantially all of the assets of the Partnership; provided, however, that except for a sale pursuant to the Option Agreement, the terms of any such sale . . . must receive the Consent of the Special Limited Partner before such transaction shall be binding on the Partnership.’” See id. at 35. The court notes that the “limited partners concede that, under section 5.4, the special limited partner need not consent to the terms of a sale if the sale is pursuant to the option agreement, for example where the nonprofit developer has exercised its right of first refusal,” but “the limited partners nevertheless contend that the special limited partner must consent to the terms of a sale if the sale is to a third party, which is what triggers the right of first refusal, before the general partner can issue a disposition notice.” See id. at 35.

In response to this argument, the court determined that Section 5.4 of the partnership agreement “states only that the special limited partner must consent to the terms of a sale ‘before such transaction shall be binding on the Partnership’” and “[a]s stated, the decision to accept a third-party offer does not itself constitute an acceptance of the offer.” See id. at 35-36. Therefore, the court determined that the issuance by the general partner of a disposition notice does not bind the partnership to sell or to accept the third party offer if the nonprofit developer failed to exercise its ROFR.

The court looked to other provisions of the partnership agreement and determined that there were no restrictions on the general partner’s authority to issue the disposition notice. The only potentially relevant provision was the one relating to the prohibition on any general partner action that would threaten the limited partner’s tax credits. The court determined that “[o]nce the compliance period has ended . . . there is nothing in the partnership agreement that restricts the general partner’s authority to issue a disposition notice, or that requires it to obtain the consent of the special limited partner before issuing such notice.” See id. at 37.

The court was careful to note that in reaching this decision, it was only interpreting the language of the agreements that were executed by the parties here and that it was not “declaring that every partnership participating in the LIHTC program must permit a right of first refusal that can be exercised under these circumstances.” See id. at 38. The case offers that parties in future LIHTC transactions are free to negotiate an agreement that contains different requirements than those set forth in this case.

The Rental Assistance Demonstration (“RAD”) is well known for the option to convert public housing subsidy to a long-term Section 8 Housing Assistance Payments contract (“HAP Contract”) — but RAD also allows owners to convert their Moderate Rehabilitation (“Mod Rehab”) and Moderate Rehabilitation Single Room Occupancy (“SRO”) contracts to a Section 8 HAP Contract.  HUD estimates that there are over twenty thousand units of Mod Rehab and SRO units across the country with no cap on the number of units that can convert through RAD (see database of units here).

Converting Mod Rehab and SRO contracts to long-term Section 8 HAPs through RAD can present advantages to both the owners of the project and the public housing authorities (“PHA”) that administer the existing contracts.  Below are just a few of the possible benefits for owners and PHAs:

Benefits to Owner:
Long-term RAD HAP Contract:

  • Likely higher rents
  • Provides stability
  • Can be used to secure/leverage financing for rehabilitation
  • Preserve affordable housing
Benefits to PHAs:
For Project Based Voucher (PBV) conversions:

  • New vouchers added to PHA’s Annual Contributions Contract (ACC)
  • PHA receives ongoing administrative fee
  • Contract administration responsibilities align with standard PBV program

For Project Based Rental Assistance (PBRA) conversions:

  • HUD administers HAP contract
  • PHA relieved of contract administration

Ballard Spahr recently hosted a webinar with HUD on the RAD conversion process for Mod Rehab and SRO projects.  You can find a recording of the webinar and the associated slides on the Ballard Spahr website.  We are happy to answer and questions you might have on the conversion process.

 

July is right around the corner and we wanted to remind everyone of the HUD deadlines for closing RAD conversions by year end:

Required Action Deadline to close by
November 30, 2018
Deadline to close by
December 31, 2018
Upload all required Financing Plan
documents*
June 15 July 13
Receive a HUD-executed RCC** August 17 September 14
Submit complete closing package** September 1 October 1
All RAD documents approved and ready for HUD signatures** November 15 December 13

* Note: FHA applications should be submitted at roughly the same time as the Financing Plan documents. PHAs should coordinate with their FHA lender to stay on track.

** Note: An RCC that has already been extended up to or beyond 6 months past the date of issuance will have a lower priority for closing during CY2018.

These deadlines don’t always align with standard low income housing tax credit closings and can sneak up quickly.  Keep the following tips in mind to manage a successful year end conversion:

  • Know the RAD checklists (PBV and PBRA) and what transaction documents must be submitted to HUD.
  • Work out any title and survey issues before HUD submission.
  • Establish a detailed RAD timeline and engage with financing partners as soon as possible on the timeline.
  • Share the HUD-required ownership and control provisions that must be included in transaction documents with financing partners prior to the circulation of draft documents.
  • Share the HUD sample RAD Subordination Agreement with lenders as soon as possible.
  • If necessary, consider prioritizing circulation and review of transaction documents that must be submitted to HUD.
  • Account for the time between receiving final HUD approval and HUD signing and mailing documents – this can take over a week.
  • Aim to make an initial submission to HUD within 2 weeks of RCC issuance (if not sooner). A submission beyond 2 months of RCC issuance will have the transaction placed in “Delayed Submission” status.
  • Make HUD aware of any targeted and hard closing deadlines.

Cheers to a smooth year end!

HUD recently issued a set of answers to frequently asked questions to provide further guidance on a new method of disposing of public housing in conjunction with a RAD conversion (the “FAQ”).   Earlier this year, HUD issued Notice PIH 2018-04 (HA) (the “PIH Notice”) addressing a number of public housing demolition and disposition issues.  In particular, Section 3.A.3.c of the PIH Notice permits a housing authority implementing a Rental Assistance Demonstration (“RAD”) project that involves new construction or substantial rehabilitation (defined as involving hard construction costs inclusive of general requirements, overhead and profit, and payment and performance bonds exceeding 60% of the HUD-published Housing Construction Costs) without the benefit of a 9% low-income housing tax credit financing.

For such projects, HUD will allow up to 25% of the units within the RAD project to be disposed under Section 18 of the U.S. Housing Act of 1937 (the “Housing Act”) and eligible for Section 8 tenant-protection vouchers with a means of project-basing the vouchers to be administered pursuant to 24 CFR Part 983 (the “PBV”).  At least 75% of the units within the project are to convert in accordance with RAD. The PIH Notice relies on the RAD definition of “project” (defined as “a structure or group of structures that in HUD’s determination are appropriately managed as a single asset. In determining whether a combination of structures constitute a project, HUD will take into account types of  buildings, occupancy, location, market influences, management organization, financing structure or other factors as appropriate. For a RAD PBV conversion, the definition of ‘project’ in 24 CFR § 983.3 continues to apply for all references to the term in 24 CFR § 983.”)  The total number of replacement units created through the combination of the RAD and Section 18 disposition processes must also satisfy RAD’s “substantial conversion of assistance” standards, meaning that conversions may not result in a reduction of the number of assisted units, except by a de minimis amount.

The FAQ offers examples and explanations of opportunities that could further enhance the viability of a RAD conversion, including the following:

  • The “substantial conversion of assistance” requirements, for example, could be applied in a manner that would designate more than 25% of the units within a project as regular PBV units under 24 CFR part 983 by placing both the TPVs realized under the Section 18 disposition process, together with the 5 units or 5% RAD de minimis allowance under the regular PBV HAP (FAQ 5).
  • A RAD/Section 18 project would utilize two HAPs – the RAD form of HAP (using the CHAP rents to be adjusted annually pursuant to the Operating Cost Adjustment Factor or OCAF) and the standard Part 983 AHAP/HAP (with rents determined based on the lesser of reasonable rent and up to 110% of the fair market rent subject to annual adjustment) (FAQ # and Initial Processing Instructions).
  • TPVs issued for the public housing units removed pursuant to Section 18 of the Housing Act can be directly project-based when the property “substantially meets Housing Quality Standards” (FAQ 3).
  • The application of relocation protections for all residents across a project regardless of the type of unit occupied by the resident (FAQ 6).
  • While conversion of public housing under RAD does not trigger eligibility for the housing authority to receive Demolition Disposition Transition Funding (i.e., formerly known as Replacement Housing Factor funding) or Asset Repositioning Fee, the housing authority would have access to such funds for the portion of the units removed through Section 18 (FAQ 7).

 

Today, HUD issued an advanced notice of proposed rulemaking requesting public comments to its 2013 Final Rule which implemented the Fair Housing Act’s disparate impact standard. HUD indicates this rulemaking is in light of the Supreme Court’s  2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which held that disparate impact claims are cognizable under the Fair Housing Act. HUD is reexamining its rule to determine if any changes may be necessary.

HUD is specifically requesting public comments to the following six questions:

  1. Does the Disparate Impact Rule’s burden of proof standard for each of the three steps of its burden-shifting framework clearly assign burdens of production and burdens of persuasion, and are such burdens appropriately assigned?
  2. Are the second and third steps of the Disparate Impact Rule’s burden-shifting framework sufficient to ensure that only challenged practices that are artificial, arbitrary, and unnecessary barriers result in disparate impact liability?
  3. Does the Disparate Impacts Rule’s definition of “discriminatory effect” in 24 CFR 100.500(a) in conjunction with the burden of proof for stating a prima facie case in 24 CFR 100.500(c) strike the proper balance in encouraging legal action for legitimate disparate impact cases while avoiding unmeritorious claims?
  4. Should the Disparate Impact Rule be amended to clarify the causality standard for stating a prima facie case under Inclusive Communities and other Supreme Court rulings?
  5. Should the Disparate Impact Rule provide defenses or safe harbors to claims of disparate impact liability (such as, for example, when another federal statute substantially limits a defendant’s discretion or another federal statute requires adherence to state statutes)?
  6. Are there revisions to the Disparate Impact Rule that could add to the clarity, reduce uncertainty, decrease regulatory burden, or otherwise assist the regulated entities and other members of the public in determining what is lawful?

The 60 day comment period ends on August 20, 2018. Interested persons can submit comments to HUD electronically through http://www.regulations.gov or by mail.

 Ballard has been closely monitoring potential changes to the Rule and will continue to do so. We will also continue to work with clients on issues pertaining to the Rule.

Please find below a memo issued last week by HUD’s Office of Recapitalization regarding the delayed submission of draft closing packages for RAD conversions. Please note that this gudiance applies to RCCs issued on or after May 1, 2018.


To: CHAP Awardees

From: Thomas R. Davis, Director, Office of Recapitalization

Date: April 27, 2018

Subject: Delayed Submission of Draft Closing Packages

This memo is to inform you of new guidelines for closing transactions after issuance of the RAD Conversion Commitment (RCC).  Paragraph 2.c. of the RCC requires that the RAD transaction close “within 90 days from the date executed by HUD…unless [the RCC is] extended by HUD in writing.”  When an RCC is issued, a RAD Closing Coordinator and HUD Counsel are assigned to review transaction documents and facilitate the approved closing.  At RCC issuance, the transaction should be ready to begin the closing process.  We have observed, however, that some teams do not submit their draft closing packages in a timely manner, unnecessarily diverting staff attention away from transactions that are ready to close.  Significant delays in closing may also require that a transaction be returned to the underwriting phase for an updated HUD review and issuance of a new RCC.  Recap is introducing a more standardized framework for processing transactions with a delayed submission of the draft closing package.

Recap expects a complete, generally acceptable, draft closing package to be submitted shortly after RCC issuance.  When a closing package has not been received within two months of the date the RCC was executed by HUD, the transaction will be placed in “Delayed Submission” status.  The transaction will be removed from the Closing Coordinator’s and Counsel’s workload so that HUD staff can concentrate on active RCCs.  During the period when an RCC is in Delayed Submission status, the outside parties must direct questions by email to RecapClosingTeam@HUD.gov.  This email address should also be used to notify HUD when a draft package is ready to be submitted.

After a transaction has been placed in “Delayed Submission” status, requests for extension of the RCC closing deadline will be reviewed more critically and, in the absence of evidence that the PHA is making progress towards closing the transaction, the RCC may be permitted to expire.  Any expired RCC is returned to the Financing Plan review stage.  Refreshing of any expired RCC involves, at a minimum, confirming or updating the Sources and Uses, the Pro-Forma, Financing Templates, relocation plans, and the Capital Needs Assessment (CNA).  Please note that all CNAs, including updates after an RCC has expired, must be submitted in the e-CNA format.  Expiration of the RCC and the requirement to update the underwriting does not affect the CHAP. Any changes to the CHAP or possible revocation of a CHAP will be handled separately by the Transaction Manager, consistent with Recap’s current practices.

The use of Delayed Submission status will begin with RCCs issued on or after May 1, 2018.  If you have an RCC issued prior to May 1, contact your assigned Closing Coordinator to discuss your progress towards closing and/or possible RCC expiration.

Thanks,

RAD Resource Desk

www.radresource.net

email: resourcedesk@radresource.net

Click here to learn more about the Qualified Opportunity Zone program and the first round of designations in a new e-alert by our Public Finance Department. For additional background, please also see previous e-alerts describing what tax incentives are available for investments in QOZs and how opportunity zones are nominated, certified, and designated.