News

Quid Pro Quo Harassment - HUD Final Rule - September 14, 2016

Quid Pro Quo Harassment - HUD Final Rule - September 14, 2016   On September 14, 2016, HUD published a final rule in the Federal Register - Quid Pro Quo and Hostile Environment Harassment and Liability for Discriminatory Housing Practices Under the Fair Housing Act.   The rule amends HUD s fair housing regulations to formalize standards for use in investigations and adjudications involving allegations of harassment on the basis of race, color, religion, national origin, sex, familial status, or disability. The rule specifies how HUD will evaluate complaints of quid pro quo ("this for that") harassment and hostile environment harassment under the Fair Housing Act. The rule defines "quid pro quo" and "hostile environment harassment," and provides examples of such harassment.   The effective date of the rule is October 14, 2016.     While Title VII of the Civil Rights Act prohibits illegal harassment in employment, until now, no standards had been formalized for assessing claims of harassment under the Fair Housing Act. Courts had applied standards first adopted under Title VII to evaluate claims of harassment under the Fair Housing Act (FHA), but such standards were not always the most suitable for assessing claims of harassment in housing discrimination cases given the differences between harassment in the workplace and harassment in or around one s home. As described in the rule, "One s home is a place of privacy, security, and refuge (or should be), and harassment that occurs in or around one s home can be far more intrusive, violative, and threatening than harassment in the more public environment of one s workplace." The Supreme Court has historically recognized that individuals have heightened rights within the home for privacy and freedom from unwelcome speech, among other things.   In addition to formalizing standards for assessing claims of harassment under the FHA, the regulation clarifies when housing providers and other covered entities or individuals may be held directly or vicariously liable under the Act for illegal harassment or other discriminatory housing practices. There has been significant misunderstanding among public and private housing providers as to the circumstances under which they will be subject to liability under the Fair Housing Act (FHA) for discriminatory housing practices undertaken by others.   The rule amends 24 CFR part 100 to establish a new subpart H, entitled, "Quid Pro Quo and Hostile Environment Harassment."   Quid Pro Quo & Hostile Environment Harassment   Any person who claims to have been injured or believes such person will be injured by prohibited harassment is an aggrieved person under the FHA, even if that person is not directly targeted by the harassment. For example, a property manager awards an apartment to an applicant in exchange for sexual favors. Other applicants, who were denied the apartment due to the manager s provision of the apartment based on sexual favors, are aggrieved persons.   Quid Pro Quo Harassment   Quid pro quo ("this for that") harassment refers to an unwelcome request or demand to engage in conduct where submission to the request or demand, either explicitly or implicitly, is made a condition related to: the sale, rental or availability of a dwelling; the terms, conditions, or privileges of the sale or rental, or the provision of services or facilities in connection therewith; or the availability, terms, or conditions of a residential real estate-related transaction. An unwelcome request or demand may constitute quid pro quo harassment even if a person agrees to the unwelcome request or demand.   The theory has most typically been associated with sex. For example, quid pro quo harassment occurs when a housing provider conditions a tenant s continued housing on the tenant s submission to unwelcome requests for sexual favors.   Hostile Environment Harassment   Hostile environment harassment occurs when unwelcome conduct is sufficiently severe or pervasive as to create an environment that unreasonably interferes with the availability, sale, rental, use or enjoyment of a dwelling, the provision or enjoyment of facilities or services relating to the housing, or the availability or terms of residential real estate-related transactions. Claims of hostile environment harassment should be evaluated from the perspective of a reasonable person in the aggrieved person s position.   Hostile environment harassment does not require a change in the economic benefits, terms, or conditions of the dwelling or housing-related services or facilities, or of the residential real-estate transaction.   Establishing hostile environment harassment requires a showing that: A person was subjected to unwelcome spoken, written or physical conduct; the conduct was because of a protected characteristic; and the conduct was, considering the totality of circumstances, sufficiently severe or pervasive that it unreasonably interfered with or deprived the victim of his or her right to use and enjoy the housing or to exercise other rights protected by the FHA.   Totality of the Circumstances   Factors to be considered in determining whether a hostile environment exists include, but are not limited to: The nature of the conduct; The context in which the conduct occurred; Will consider factors such as whether the harassment was in or around the home; Whether the harassment was accomplished by use of a special privilege of the perpetrator (e.g., using a passkey or gaining entry by reason of the landlord-tenant relationship); Whether a threat was involved; and Whether the conduct was likely to or did cause anxiety, fear or hardship. The severity, scope, frequency, duration, and location of the incident(s); and The relationship of the persons involved. Neither psychological nor physical harm must be shown to prove that a hostile environment exists. Evidence of psychological or physical harm may, however, be relevant in determining whether a hostile environment existed and, if so, the amount of damages to which an aggrieved person may be entitled.   It is particularly important to consider the place where the conduct occurred. In a case decided under the Equal Protection Clause of the Constitution, the Supreme Court described the sanctity of the home as follows: "Preserving the sanctity of the home, the one retreat to which men and women can repair to escape from the tribulations of their daily pursuits, is surely an important value." "The State s interest in protecting the well-being, tranquility, and privacy of the home is certainly of the highest order in a free and civilized society."   When harassment occurs in and around the home, the victim has little opportunity to escape it short of moving or staying away from the home - neither of which should be required. As one court noted in a sexual harassment case under the FHA, the home is a "place where one is entitled to feel safe and secure and need not flee." (Quigley v. Winter, 8th Cir. 2010). Because of the importance of the home, the rule states, "the same or similar conduct may result in a violation of the Fair Housing Act even though it may not violate Title VII." This final rule establishes a lower threshold to show hostile environment under the FHA than that required for employment. Type of Conduct   Prohibited quid pro quo harassment and hostile environment harassment require unwelcome conduct. Such conduct may be written, verbal or other conduct and does not require physical contact. Examples include threatening imagery (e.g., cross burning or swastika), damaging property, physical assault, threatening physical harm, or impeding the physical access of a person with a mobility impairment. Unwelcome conduct can be spoken or written, such as requests for sexual favors. It may include gestures, signs, and images directed at the aggrieved persons. It may include the use of racial, religious or ethnic epithets, derogatory statements or expressions of a sexual nature, taunting or teasing related to a person s disability, or threatening statements. The unwelcome conduct may involve the use of email, text messages or social media.   An individual violates the Act so long as the quid pro quo or hostile environment harassment is because of a protected characteristic, even if he or she shares the same protected characteristic as the targeted person.   With respect to sexual harassment, harassing conduct need not be motivated by sexual desire in order to support a finding of illegal discrimination. Sexually harassing conduct must occur "because of sex." For example, conduct motivated by hostility toward persons of one sex; conduct that occurs because a person acts in a manner that conflicts with gender-based stereotypes of how persons of a particular sex should act; or conduct motivated by sexual desire or control.   Number of Incidents   A single incident can constitute an illegal quid pro quo, or, if sufficiently severe, a hostile environment. In Quiqley v. Winter, the court cited as a quid pro quo violation the implication by a landlord that the return of a security deposit depended on seeing the plaintiff s nude body or receiving a sexual favor. The court also stated that touching of an intimate area of a plaintiff s body is conduct that can be sufficiently severe to create a hostile housing environment - even if it was an isolated incident.                     Establishing Liability for Discriminatory Housing Practices   Direct Liability   A person is directly liable for failing to take prompt action to correct and end a discriminatory housing practice by that person s employee or agent where the housing provider knew or should have known of the discriminatory conduct. The final rule also states that a person is directly liable for failing to fulfill a duty to take prompt action to correct and end a discriminatory housing practice by a third party (i.e., a non-agent) when the person knew or should have known of the discriminatory conduct.   With respect to a person s direct liability for the actions of an agent, the law recognizes that a principal who knows or should have known that his or her agent has engaged in or is engaging in unlawful conduct and permits it to continue is complicit in or has approved the discrimination. With regard to direct liability for the conduct of a non-agent, the traditional principle of liability that a person is directly liable under the Act for harassment perpetrated by non-agents if the person knew or should have known of the harassment, had a duty to take prompt action to correct and end the harassment, and failed to do so or took action that he or she knew or should have known would be unsuccessful in ending the harassment. For example, an owner may be liable for acts of tenants after failing to respond to a tenant s complaints of harassment (see Neudecker v. Boisclair Corp., 8th Cir. 2003). This indicates that management will be held liable for tenant-on-tenant harassment if they know of the harassment and fail to take action. It is important to note however, that not every quarrel among neighbors amounts to a violation of the FHA.   Corrective actions appropriate for a housing provider to use to stop tenant-on-tenant harassment might include verbal and written warnings; enforcing lease provisions to move, evict or otherwise sanction tenants who harass or permit guests to harass; issuing no trespass orders or reporting conduct to the police; and establishing an anti-harassment policy and complaint procedure. When the perpetrator is an employee of the housing provider, corrective actions might include training, warnings, or reprimands; termination or other sanctions; and reports to the police. The housing provider should follow up with the victim of the harassment after the corrective action is taken to ensure that it was effective.   The "knew or should have known" concept of liability is well established in civil rights and tort law. A principal "should have known" about the illegal discrimination of the principal s agent when the principal is found to have had knowledge from which a reasonable person would conclude that the agent was discriminating. For example, if a housing provider s male maintenance worker enters female tenants units without notice using a passkey, and enters their bedrooms or bathrooms while they are changing or showering and exposes himself, and the tenants complain about this conduct to the manager, the manager has reason to know that unlawful discrimination may have occurred. If the manager conveys this information to the owner, and neither the owner nor the manager takes any corrective action, they are both liable for violating the FHA. In such as case, the principal is liable as if the principal had committed the act.     Vicarious Liability   A person is vicariously liable for the discriminatory housing practices of his or her agents or employees based in "agency law." Under agency law, a principal is vicariously liable for the actions of his or her agents taken within the scope of their relationship or employment, as well as for actions committed outside the scope of the relationship or employment when the agent is aided in the commission of such acts by the existence of the agency relationship. Unlike direct liability, someone may be vicariously liable for the acts of an agent regardless of whether the person knew of or intended the wrongful conduct or was negligent in preventing it from occurring. To be vicariously liable, an agency relationship must exist.   Unlike Title VII, the "affirmative defense" against vicarious liability does not apply to fair housing, and no known court case has extended the Title VII affirmative defense to fair housing claims. Under Title VII, an employer may avoid vicarious liability by showing that the employer exercised reasonable care and took corrective action, and that the victim failed to take advantage of administrative options to address the issue. In the housing context, whether the perpetrator is a property manager, mortgage loan officer, a realtor or a management company s maintenance person, a housing provider s agent holds an unmistakable position of power and control over the victimized home seeker or resident. For example, a property manager can recommend (or sometimes even initiate) the eviction of a harassment victim or refuse to renew a lease, while a maintenance employee may withhold repairs to a victim s apartment or may access the victim s apartment without proper notice or justification.   This rule is the first comprehensive guidance from HUD regarding the issue of harassment, and will have a significant impact on fair housing harassment cases in the future - especially those relating to sexual harassment.     All housing operators should become familiar with this final rule and pass it along to their attorneys. Written company policies should be established that make it clear that harassment of any type will not be tolerated. These policies should include examples of prohibited conduct and encourage anyone who feels they have been harassed to file a complaint, and provide details on how to do so.      

HUD Notice on Revised Independent Student Rules, September 21, 2016

HUD published a Notice in the September 21, 2016 Federal Register, effective immediately, revising the rules regarding eligibility of independent students for Section 8 housing.   Background   The final rule establishing eligibility of students for Section 8 assistance was published on December 30, 2005, and updated on April 10, 2006. The rule required that a student at an Institution of Higher Education meet certain requirements in order to be eligible for Section 8 rental assistance. In order to be eligible, the student had to either be independent of their parents for at least one year, or be an "independent student" as defined by the United States Department of Education (ED). An "independent student" was one who met any one of the following requirements: Age 24 or older; A veteran of the U.S. military; Married; or Have a child or children who are dependents for IRS purposes. If a student did not meet one of these requirements, he or she could still be deemed eligible if they: Are of legal contract age under state law; Established a household separate from their parents or guardians for at least one year prior to applying at the property; Were not claimed as dependents on a federal tax return by their parents; and Obtain a certification of financial assistance (even if none is provided) from their parents.   If the student could not meet either of these tests, they could still qualify if their parent(s) would qualify for Section 8 assistance in the locality where the parents lived.   The purpose of this Notice is to update the definition of an "independent student."   The Changes   In 2007, the ED amended the definition of "independent student" by adding additional provisions: It expanded orphans or wards of the court to include orphans, children in foster care, or who were wards of the court at any time from age 13 on; Added students who are or were emancipated or in legal guardianship immediately prior to turning 18; and Unaccompanied youths who are homeless or at risk of homelessness.   HUD is now conforming its definition of "independent student" with that of the ED. The revised definition of an "independent student" is an individual who: Is age 24 or older by December 31 of the award year; Is an orphan, in Foster Care, or a Ward of the Court, or was an orphan, in Foster Care, or a Ward of the Court at any time from age 13; Immediately prior to the age of majority, was an emancipated minor or in legal guardianship as determined by a court; Is a veteran of the United States military or on active duty for other than training (i.e., not Guard or Reserve); Is a graduate or professional student; Is married; Has legal dependents other than a spouse; or Was verified during the school year as either an unaccompanied youth who is homeless or at risk of homelessness and is self-supporting. This must be verified by A local educational agency s homeless liaison; The director (or designee) or a program funded under the Runaway & Homeless Youth Act; The director of a program funded under Subtitle B of Title IV of the McKinney-Vento Homeless Assistance Act; or A financial aid administrator   Requirements for verifying a student s independence from his or her parents have also been amended. Many of these youth are not connected to their parents or caregivers, so HUD is clarifying that the tax return requirement only applies to the student s tax returns.   Students who are orphans, in Foster Care, wards of the court from age 18, emancipated or under legal guardianship, homeless or at risk of homelessness are considered "vulnerable youth." In this case, they are automatically considered an "independent student."   When determining a student s independence from parents, all of the following are required: Review and verification of previous address information in order to confirm a separate household; Review of student s prior year tax returns to verify independence; and A written certification of support or nonsupport from the parent(s). If any of these three requirements are not met, proof of the parents eligibility for Section 8 assistance is required.   This Notice focuses on students under age 24 who are not residing with their parents and who are seeking individual assistance.

Fair Housing Guidance for Persons with Limited English Proficiency, September 15, 2016

On September 15, 2016, the HUD Office of General Counsel provided guidance on Fair Housing Act protections for persons with Limited English Proficiency (LEP). The guidance discusses how the Fair Housing Act (FHA) applies to housing providers when dealing with individuals with limited abilities relating reading, writing, speaking, or understanding English. The guidance addresses how the disparate treatment and discriminatory treatment provisions of the FHA will apply in these cases. Owners of properties that receive federal financial assistance have greater obligations to provide meaningful access to LEP persons under Title VI of the Civil Rights Act of 1964. This guidance does not apply to those properties.   Background   Individuals with LEP are not protected under the FHA. However, the FHA prohibits housing providers from using LEP selectively based on a protected class or as a pretext for discrimination due to a protected characteristic.   Over 25 million persons in the United States are LEP (about nine percent of the total population). The link between national origin and LEP is obvious but is also supported by statistics. In the U.S., 34% of Asians and 32% of Hispanics are LEP, yet only 6% of whites and 2% of non-Hispanic whites are LEP. 61% of persons born in Latin America and 46% of persons born in Asia are LEP. Only 2% of persons born in the U.S. are LEP. Based on this data, housing decisions based on LEP generally relate to race or national origin. "National origin" means the geographic area in which a person was born or from which his or her ancestors came.   Although language discrimination is not necessarily national origin discrimination, national origin discrimination includes discrimination because an individual has the physical, cultural, or linguistic characteristics of persons from a foreign geographic area. For this reason, courts have found a link between language requirements and national origin discrimination.   National statistics demonstrate a connection between citizenship and LEP. Although discrimination against non-citizens or those with a particular immigration status is not national origin discrimination in and of itself, a requirement involving citizenship or immigration status will violate the FHA when "it has the purpose of unjustified effect of discriminating on the basis of national origin." (Quoting Espinoza v. Farah Mfg., Co.).   Intentional Discrimination   Selectively enforcing a language-related restriction based on a person s protected class violates the FHA, as does using LEP as a pretext for intentional discrimination.   The guidance states that often, "lack of English proficiency is used as a proxy for national origin discrimination." (Aghazadeh v. Me. Med. Ctr - 1999). Courts have held that language related restrictions deserve close scrutiny and should be closely examined. Justifications for language-related restrictions in housing will be looked at closely to see if the real reason for the policy is race or national origin discrimination. Any blanket refusal to deal with LEP persons will be suspect because such persons may speak English well enough to deal with essential housing-related issues or may have a friend or household member who can provide assistance as needed. Examples of suspicious policies include: Advertisements containing blanket statements such as "all tenants must speak English," Turning away any applicant who does not speak English; or Banning residents from speaking other languages other than English on the property or disparaging residents for speaking any language other than English. Intentional discrimination may also be shown by policies or practices that discriminate against persons based on their primary language. For example, if a housing provider has a policy of not renting to persons who speak a certain language, but will rent to persons who speak other languages, this is likely intentional national origin discrimination.   Some courts have recognized as legitimate the needs of employers to require that employees speak English for effective supervision, a cohesive workforce, and customer relations. However, this need does not apply in the housing context.   Disparate Impact   A housing provider violates the FHA when the provider s policy or practice has an unjustified discriminatory effect, even when the provider has no intent to discriminate. Unless a policy is necessary to serve a substantial, legitimate, nondiscriminatory interest of a housing provider, any policy that restricts access to housing based on LEP may be considered discrimination based on national origin, race, or some other protected characteristic. Even if the policy does serve the business interests of the housing provider, it will still be considered discriminatory if another, less discriminatory practice, may serve such interest.   The determination of whether a policy or practice results in a disparate impact is always fact and case-specific. However, available data may be used to support individual cases, including census data.   It is also important to remember that a policy affecting LEP persons can have a disparate impact on persons of multiple national origins. In the Faith Action for Community Equity case, a Title VI challenge to Hawaii s decision to stop offering its driver s license test in eight non-English languages, the court stated "If a policy differently affects individuals from nations where English is the primary language and nations where it is not, then the policy has a disparate impact."       If a housing provider implements a policy against non-English speakers, the provider must be able to provide evidence that there is a substantial, legitimate, and non-discriminatory reason for the policy, keeping in mind that many of the employer justifications for such a policy will not apply in the housing context.   In summary, this guidance makes it clear that selective application of a language-related policy, or use of LEP as a pretext for unequal treatment of individuals based on race, national origin, or other protected characteristics, violates the FHA. Also, even if there is no intent to discriminate, restrictions on access to housing based on LEP are likely to have a disparate impact on certain protected classes and, if not legally justified, may violate the Act under the disparate impact theory of fair housing law.    

HUD Proposed Rule - Lead Based Paint Hazards

HUD published a proposed rule in the September 1, 2016 Federal Register titled "Requirements for Notification, Evaluation, & Reduction of Lead-Based Paint Hazards in Federally Owned Residential Property & Housing Receiving Federal Assistance; Response to Elevated Blood Levels."   The proposed rule amends HUD s lead-based paint regulations on reducing blood lead levels in children under age 6 who reside in pre-1978 federally owned or assisted housing. The rule will also establish more comprehensive testing and evaluation procedures for the housing.   HUD is formally adopting the Center for Disease Control (CDC) definition of "elevated blood lead levels (EBLL)."   Comments on the proposed rule are due by October 31, 2016.   Background   In 2014, the CDC found that "lead-based paint and lead contaminated dust are the most hazardous sources of lead for U.S. children."   There remain a considerable number of assisted housing units with lead-based paint in which children under six reside. Approximately 4.3 million units are covered by the proposed rule. About 450,000 were built prior to 1978 and approximately 57,000 still contain lead-based paint hazards.   Regulatory Approach   The following types of assistance are covered by the proposed rule: Project-based assistance provided by federal agencies other than HUD (e.g., Rural Development Service); HUD Project-Based Assistance; HUD-owned and Mortgagee-in-possession multifamily properties; Public housing programs; and Tenant-based rental assistance (e.g., Housing Choice Vouchers).   The CDC s revised guidance is that children under six should not live or spend significant time in homes with lead exposure hazards.   This rule proposes to revise the Lead Safe Housing Rule (LSHR) to adopt the CDC approach to establishing a blood lead level for which an environmental intervention will occur. This is a "trigger" level at which a housing owner will have to take specific action in response to a child s elevated blood level. The rule also proposes to revise the type of hazard control undertaken when hazards are identified. In the case of multifamily projects, any unit with children under six will have to be addressed.     Proposed Protocol   When a child under six is discovered to have an EBLL, the owner or agency will have to undertake certain actions. The primary requirements will be: Conducting an environmental investigation of the unit in which the child lived at the time the blood was last sampled, and of common areas servicing the "index" unit. An "index" unit is the unit in which the child resides. Conduct interim control of lead-based paint hazards identified in the index unit. This may include specialized cleaning, repairs, maintenance, painting, and temporary containment. It may also require temporary relocation of the family. Controlling other related sources of lead exposure (e.g., lead-contaminated debris); and Request assistance of the occupants in identifying non-housing related sources of exposure (e.g., cosmetics, pottery, folk remedies, take-home exposure from the workplace, etc.).   Procedure for Environmental Investigation   The following steps would be required when conducting the investigation: A review of the findings of any previous lead-based paint inspections and investigations; Conducting a comprehensive interview of the family of the child; Conducting a risk assessment; and Augmenting the risk assessment through consultation with the local health department managing the child s EBLL case.   This proposed rule is complex and comprehensive. Owners of pre-1978 federally assisted projects that have not been cleared of lead-based paint hazards should review the entire proposed rule and make any desired comments to HUD no later than October 31, 2016.

Valuation of LIHTC Properties

The line item for property taxes is often the most costly item in a Low-Income Housing Tax Credit (LIHTC) project's operating budget.   First, it is important to understand that there is no consistency in the valuation of LIHTC projects for assessment purposes. There are differing state laws and conflicting court decisions. Many LIHTC practitioners believe that the federal government can intercede with regard to how LIHTC properties are valued. After all, the Low-Income Housing Tax Credit Program is a federal - not a state - program. However, reviewing courts have consistently found that including the credits in valuation neither violates the Constitution s Supremacy clause nor federal case law. So, this issue of how to handle valuation for real estate tax purposes is completely a state issue. The primary case in this area is Parkside Townhomes Associates v. Board of Assessment Appeals of York County (1982).   From an assessor s standpoint, the key is whether or not the state has any guidance in the form of statutes. If not, does the state allow assessors to apply case law when deciding how to handle assessments? If a state does not have a statutory requirement for the valuation of LIHTC projects, it is up to the assessor (within the confines of any state court decisions) regarding how to assess these properties.   As for my opinion on how these properties should be assessed, I believe that first, restricted rents should be used to establish value based on the income approach - not market rents. I also believe (and this is where I differ from many in our industry), that while tax credits are intangible property, they are still a value enhancer for the properties, especially in the early years of the credit period. Most case law says that an intangible asset can add value to a tangible asset. In Roehm v. County of Orange (1948), the court stated that intangible values "that cannot be separately taxed as property may be reflected in the valuation of taxable property." A more closely related case from 1991, Meadowlands, Ltd Dividend Housing Association v. City of Holland, held that in valuing a mortgage interest subsidy for low-income housing, an assessor should take into account the mortgage interest subsidy paid by the federal government to the mortgage lender. Per the court, " although the mortgage-interest subsidy is an intangible, and not taxable in and of itself, it is a value-influencing factor."   Tangible vs. Intangible Benefit   While most state statutes consider LIHTCs to be "intangible" property, the courts have not been as taxpayer friendly. Some courts have concluded that while the credit may not be tangible property, they may still be a "value enhancing" element. This is similar to the position taken in Meadowlands, noted above.   What is an "intangible" benefit? Black s Law Dictionary defines intangible property as "any property that lacks a physical existence." The Supreme Court stated in Curry v. McCanless (1939), that intangibles are "rights which are not related to physical things relationships between persons, natural or corporate, which the law recognizes by attaching to them certain sanctions enforceable in courts. The power of government over them and the protection which it gives them cannot be exerted through control over a physical thing. They can be made effective only through control over and protection afforded to those persons whose relationships are the origin of the rights."   A central question is whether an intangible asset can add value to a tangible asset. Case law says yes - and truthfully, so does common sense. In Roehm v. County Board or Orange (1948), the court stated "Intangible values that cannot be separately taxed as property may be reflected in the valuation of taxable property." The Meadowlands case cited above is closely related. It was the holding of the court that in valuing a mortgage-interest subsidy (this is similar to the HUD Section 236 and Rural Development Section 515 subsidies) for low-income housing, an assessor should take into account the mortgage interest subsidy paid by the federal government to the mortgage lender. As stated in the decision, "although the mortgage-interest subsidy is an intangible, and not taxable in and of itself, it is a value-influencing factor." Based on a consistent line of reasoning in court cases, at least some of the value associated with the LIHTC should be included in property valuation.   Market Rents vs. Restricted Rents   A clear majority of courts have ruled that restricted rents must be taken into account when assessing the value of an LIHTC property. But, what about other subsidies - such as rental assistance? The majority of court decisions addressing whether government subsidy impacts the value of low-income properties and should be included when determining value for property tax purposes have concluded that the subsidy may be considered. The general theory of the courts has been that a low-income housing contract in an investment tool for maximizing the value of the real estate. However, rents that are restricted to levels below the market do have a negative impact on value. In 1995, the Oregon Supreme Court in Bayridge Assoc. Ltd. Partnership v. Department of Revenue ruled that rent restrictions are "governmental restrictions" and require "a reduction in valuation." In the same case, the court found that the LIHTC was an "intangible" benefit.   Relevant State Court Decisions   The key issue in virtually all state court decisions has been "tangible" vs. "intangible."   Huron Ridge, LP v. Township of Ypsilanti (2005) - The Michigan Tax Tribunal determined that tax benefits were tangible since they would be part of a purchaser s evaluation. But, what if the credits had all been used? The court ruled that if the tax benefits are transferable, they must be part of the valuation. This clearly inferred that if such benefits were not transferable (i.e., no longer existed), they would not be part of the valuation.   The most dramatic case with which I am familiar was the case of Meridian West, a LIHTC property in Miami, FL. It was originally assessed at over $15 million, but was reduced to $6.3 million after a formal appeal - a decrease of 58%.   Some state courts have ruled that credits should not be considered in valuation. These include: Missouri - ruled that credits are not a characteristic of the property, but are assets with direct monetary value. However, the value is attributable to the owner -not the property; and Arizona - here, the key element in value is the restricted income - not the credits. Other states that do not include the value of the credits include Washington, Montana, and Oregon.   On the other side of the ledger, a South Dakota court ruled in Town Square LP v. Clay County Board of Equalization that "tax credits make ownership of the subject property more desirable and enhance the value of the property in the marketplace."   In Epping Senior Housing Associates, LP v. Town of Epping, a New Hampshire court ruled that since credits are part of the bundle of rights enjoyed by the owner, they should be part of the valuation.   The Kentucky Board of Tax Appeals ruled in Brandywine Apartments, Ltd. V. Madison County Property Valuation Administrator that appraisers must consider rent and income restrictions when determining the value of a property. In this case, the Richmond, KY assessor had valued the property at $1.04 million for 2014 and 2015. The owner claimed the value was $580,000 due to income and rent restrictions, and the court agreed.   In 2013, the Supreme Court of Mississippi determined that the state law requiring ignoring the value of the credit in assessments is constitutional. Mississippi law requires that the value be determined based on net operating income.   State Statutes   To my knowledge, 22 states legislate the valuation of LIHTC projects, thus avoiding the constant court challenges. However, the law remains unclear in many of these states since few have addressed both whether the LIHTC can be valued and restricted rents should be used.   Several states require assessors to use the income approach to valuation and fully exclude the tax benefits. These include New York, California, Maryland, Nebraska, Illinois, Iowa, Georgia, Utah, Pennsylvania, Arkansas, Wisconsin, Colorado, Florida, and Indiana. All these states exclude valuation of the credit.   States that have determined the credits to have tangible value include North Carolina, Connecticut, Kansas, Tennessee, and Idaho.   Valuation Methodology   I strongly believe that if the value of the credit is considered in the valuation of a property, only the remaining value should be considered. For example, after all credit has been claimed, the price offered by a new purchaser will be substantially less. After all credit has been claimed, the value of the credit is zero and the valuation of the property should be based solely on the restricted rents based on the remainder of the extended use agreement.   After reviewing many state laws and court cases on the valuation issue, I have reached some personal conclusions:   Tax credits are intangible property; Tax credits are so clearly integral to the economic viability of a project that they must be considered in the valuation; and While part of the property value is related to the credits, as the property ages the value of the credits diminishes.   These are just my observations regarding valuation of LIHTC properties. Every owner should be familiar with the procedures in their own states and be prepared to consider those procedures during the planning and underwriting phases of a project.            

HUD Update on HOME Utility Allowance Requirements - August 2016

The 2013 HOME Final Rule established revised utility allowance requirements for the HOME Program. HUD Community Planning & Development recently provided updated guidance on the timeframe for implementation of the final rule and acceptable methodologies relative to the determination of utility allowances for HOME units.   Background   The HOME statute and 24 CFR Part 92 state that gross rent for HOME units includes both the rent and utilities or a utility allowance (UA) when there are tenant-paid utilities. Participating Jurisdictions (PJs) are required to establish the UAs and to update them annually. In establishing a UA, the PJ may use the HUD Utility Schedule Model (HUSM) or any of the methods approved for establishing an allowance under the Section 42 Low-Income Housing Tax Credit Program. This utility allowance requirement is found at 24 CFR part 92.252(d) and is applicable only to projects that received a commitment of HOME funds on or after August 23, 2013.   Guidance from HUD indicates that PJs must immediately implement the UA requirements for HOME commitments made on or after the August 23, 2013 date. This is now required for all projects that are completed and occupied. Once in place, owners must comply with the UA requirements at lease renewal or as soon as feasible.   PJs may not use the UA of the local Public Housing Agency (PHA) for these projects. However, projects for which HOME funds were committed prior to August 23, 2013, may continue to use the PHA allowance.   If PJs choose not to use the HUSM, the UA must be established using a project-specific method. Such a method must be based on actual utility usage or project-specific factors (e.g., size, orientation, building materials, HVAC systems, and local climate).   Responsibility for UA Determination   The HOME rule requires that the HOME UA be established by the PJ. However, the new HUD guidance allows PJs to require owners to complete initial utility allowances and send them to the PJ for review and approval. This essentially means that the PJs are not actually required to "establish" the allowance. Staff costs for determining the initial UA - prior to project completion - is a project eligible soft-cost.   PJs may: Determine a UA with PJ staff or qualified professionals; or Require owners to use a specific method or choose from acceptable methods; or Accept a UA approved by another funder (e.g., LIHTC Housing Finance Agency) as long as the calculation uses one of the HOME approved methods.   Acceptable Methods   A PJ may accept one or more methods or require a single method. However, only one method may be used for a project. The acceptable methods are: HUSM; Multifamily Housing Utility Allowance, as outlined in Notice H-2015-4 (if this method is used, all requirements of the Notice must be followed); Utility Company estimate; LIHTC Agency estimate; or Energy Consumption Model (Engineer Model)   Owners of projects with HOME funds awarded on or after August 23, 2013, should check with the appropriate PJ on how these UA requirements will be implemented if they have not already been put into place.

Family Self Sufficiency Program for Multifamily Housing

HUD issued Notice H-2016-08 on August 26, 2016. This Notice relates to the Family Self Sufficiency (FSS) Program in Multifamily Housing. FSS is a HUD program that provides incentives and support to families in MF assisted housing to increase their earned income and reduce dependence on public assistance. The program has long been used in the public housing and voucher programs, but is now available to owners of privately owned HUD-assisted multifamily housing, such as Section 8. The program is voluntary for both owners and the families living The program is voluntary for both owners and the families living at the properties. Owners wishing to participate in the program will work with public and private resources in the development and implementation of the program. Typical family services include childcare, transportation, education, job training, employment counseling, financial literacy, and homeownership counseling. Participating families work with a five-year plan and are required to enter into an agreement with the owner. The goals are outlined in the plan, and when a family meets its goals and completes the FSS contract, they become eligible to receive funds deposited in an escrow account. The owner will establish an interest-bearing escrow account for each family. HUD will fund the account through adjustments to rental subsidy payments to the owner. If a family s rent increases due to an increase in earned income while participating in the FSS program, the owner will credit the incremental rent due to the increase in earned income to the family s escrow account. When a family completes the program, they may access the escrow funds and use them for any purpose. Funding Congress has not yet appropriated any funds for the employment of FSS coordinators in multifamily housing. However, owners may use residual receipts to assist in paying for the position of the FSS program coordinator. HUD may approve HUD may approve release of residual receipts as an advance rather than a reimbursement, on a semiannual basis. No more than six months of expenses will be advanced at one time. Owners using residual receipts to pay for FSS coordinators are exempt from the requirement to use residual receipts to offset Section 8 payments. Owners will be required to: 1. Coordinate services with local agencies; 2. Develop an Action Plan and submit to HUD for approval; 3. Recruit and screen program participants; 4. Create and execute a contract with participating families; 5. Provide service coordination, case management, or coaching; 6. Create FSS escrow accounts and manage the funds; 7. Submit quarterly reports to HUD; and 8. Comply with fair housing requirements. Participating families will be required to: 1. Execute the contract with the owner; 2. Head of household must seek and maintain suitable employment during the term of the agreement; 3. Work with the owner to set program goals; 4. Complete required activities by established deadlines; 5. Report increases in earned income immediately; 6. Become independent from welfare assistance and remain independent for at least one year before the contract term expires (this applies to all family members); and 7. Comply with the terms of the lease. Program Development & Approval Procedures Owners will be required to have a HUD-approved Action Plan before implementing an FSS program. As part of the approval process, HUD will assess the owner s ability to run an FSS program by reviewing recent Management and Occupancy Reviews (MORs) and the Financial Assessment Subsystem (FASS) score. The most recent MOR review must be Satisfactory or higher and the owner must be current in the submission of all required financial statements. The Action Plan must be comprehensive and include information on: Family demographics; Estimate of participating families; FSS family selection procedures; Incentives plan; Outreach efforts; FSS activities and supportive services; Description of funding sources; Identification of family support needs; Owner policies regarding termination of family participation; Rights of non-participating families; and Timetable for program implementation. Clearly, development of an FSS program at a HUD multifamily property will be time-consuming and labor intensive. Owners will have to decide whether The Action Plan must be comprehensive and include information on: Family demographics; Estimate of participating families; FSS family selection procedures; Incentives plan; Outreach efforts; FSS activities and supportive services; Description of funding sources; Identification of family support needs; Owner policies regarding termination of family participation; Rights of non-participating families; and Timetable for program implementation. Clearly, development of an FSS program at a HUD multifamily property will be time-consuming and labor intensive. Owners will have to decide whether Clearly, development of an FSS program at a HUD multifamily property will be time-consuming and labor intensive. Owners will have to decide whether creation of such a program will be worth the time and effort involved. One reason for consideration of the program may be the potential for extra points under State Qualified Allocation Plans (QAPs) for Section 8 properties seeking to layer Low-Income Housing Tax Credits. If a State Agency will award additional competitive points for a program such as FSS, it may be worthwhile to develop such a plan. Interested owners should obtain a copy of the Notice and examine the requirements carefully.

HUD Issues New Guidance on Multifamily Utility Allowance Determination

HUD has provided updated information to HUD Notice H-2015-04, Methodology for Completing a Multifamily Housing Utility Allowance. The additional information relates to six areas of the original HUD Notice.   Baseline Analysis Owners/Agents (O/A) are required to submit documentation to HUD or the Contract Administrator (C/A) when requesting approval of a UA. Backup information could include: Copies of tenant data received from utility providers; or Copies of printouts indicating a summary of monthly data if the tenant was able to obtain data online from their utility provider for the previous 12-months, or ten-months as the case may be; or If the O/A obtained actual monthly utility bills from the tenant, the O/A may submit a spreadsheet summarizing an average of the monthly bills. Actual utility bills may be requested at the discretion of HUD/CA. These bills, regardless of whether they are provided to HUD/CA, must be retained by the owner for three years; At the discretion of HUD/CA, there may be cases where a combination of the information noted above will have to be provided. The new guidance also establishes a limit to the age of data used in the analysis. The utility analysis should be prepared four to six months prior to the anniversary date of the contracts, with submitted data covering the prior 12-month period. Thus, at the time of contract renewal, the data used in the analysis to support the UA should generally be no more than 18-months old. Release Forms HUD has clarified that refusal by a tenant to sign a release form for release of utility information can be considered a lease violation. According to HUD, a tenant refusal to sign a release form constitutes material noncompliance with the lease agreement, as defined in the lease agreement, and repeated violations can result in termination of tenancy. Further, for properties other than 236 and 221(d)(3), not signing the release form is a violation of the regulatory obligations of the tenant found at 24 CFR 5.659(b)(1).   To add clarity to this requirement, HUD encourages owners to include language in their rules and regulation (House Rules) advising tenants of their obligation to sign release forms and to provide any information deemed necessary to administer the program, or face possible termination.   Utility Assistance as Income   HUD also provided guidance that is applicable only in California. Some utility bills in CA include a "climate credit," and the question has been raised regarding whether or not this credit should be included in the UA calculation. HUD s response is no - the California Climate Credit should not be used by owners in calculating utility allowances and should be removed from the cost totals. This is because, while the California climate credit is delivered to California residents through their utility bills, the California Public Utilities Commission (CPUC) has held that the climate credits "should not be considered a reduction in the individual customer s electricity bill." Instead of being used to offset utility allowances, California climate credits should be considered "income" for the purposes of recertification. This guidance applies only to the California Climate Credit. Questions relating to similar state or local benefits will be reviewed by HUD on a case-by-case basis.   The Factor-Based Utility Allowance Analysis   Going forward, Utility Allowance Factors (UAF) will be effective on the same date as the OCAF, which is typically February 11 of each year. Factors for 2017 will be release at the same time as the FY 2017 OCAF.   Also, the UAF will not automatically be applied to the prior year UA. HUD systems will not automatically apply the UAF to the prior year UA, nor is it the CAs responsibility. UA regulations require the owner to "submit an analysis of the project s utility allowances" for review and approval each year. This requirement extends to the factor-based years in which an owner will show how the factor was applied and identify the resulting UA recommendation.   Utility Allowance Decreases - Phase In   O/As are required to phase-in UA decreases, but only in the initial implementation of the new methodology, and only if the decrease exceeds 15% AND is equal to or greater than $10. UA phase-in eligibility is determined at the time of the first baseline analysis after implementation of Housing Notice 2015-04 only. At this time, the total decrease should be examined to determine if the decrease is more than 15% or $10 from the last UA provided. Following is an example of how a three-year phase in would be applied: Year One Current UA: $90 Decrease in First year: 40% New Calculated UA: $54 Year one UA: $77 (with a phase-in cap of 15% each year, the new capped UA is $77 ($90 minus 15%). This is the UA that is implemented in year one.   Year Two Second year UAF (applied to uncapped new UA): +2% New Actual UA: $55 ($54 + 2%) Tenant s second year capped UA: $65 ($77 minus 15%) - (The UA that is implemented in year two is $65 even though the calculated UA is $55).   Year Three Third year UAF (applied to uncapped second year UA): +2% New actual UA: $56 ($55 + 2%) Tenant s third year UA: $56 (implement the actual calculated UA as it is less than 15% lower than the prior year s UA). In this example, the phase-in occurs over two years of the cycle (baseline year, plus first factor-adjusted year). In each of the factor-adjusted years, the factor is applied to the previous year s calculated UA, i.e., what the UA would have been if there were not a cap applied because of the requirement to phase it in. After that, there is a new baseline and phase-in requirements no longer apply. Miscellaneous   HUD has clarified that a Section 811 Project Rental Assistance (PRA) property with a Rental Assistance Contract (RAC) must separate the PRA units from the project-based units when completing the utility analysis. In other units, projects of this type will conduct a separate analysis for the PRA units and the RAC units.   Owners and Agents should review this additional information in conjunction with a review of HUD Notice H-2015-04, issued on June 22, 2015. These requirements apply 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.