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BATTLES FARM CO. v. HILLS

June 8, 1976

BATTLES FARM COMPANY et al., Plaintiffs,
v.
CARLA A. HILLS, Secretary of the Department of Housing and Urban Development, Defendant



The opinion of the court was delivered by: PRATT

 This is an action brought by four owners of federally subsidized, multifamily housing projects to obtain a subsidy enacted by Congress to enable these projects to keep pace with mounting utility bills and local property taxes and at the same time maintain rents paid by tenants at levels appropriate for the lower income families that they house. Faced with comparable actions, at least nine district courts throughout the United States have already held that this is a mandatory subsidy. This Court agrees and enters the following Findings of Fact and Conclusions of Law.

 Findings of Fact

 1. Plaintiffs Battles Farm Company, Bay Village Company, Cummings Towers Company, and Southfield Gardens Company are, respectively, the owner/mortgagors of the following projects that are insured and receive mortgage interest reduction payments under Section 236 of the National Housing Act, 12 U.S.C. § 1715z-1 ("Section 236"): Battles Farm FHA # 023-44075-LDP, containing 320 units, located in Brockton, Massachusetts; Bay Village FHA #023-44005-LDP, containing 206 units, located in Fall River, Massachusetts; Cummings Towers FHA #023-44072-LDP, containing 238 units, located in Boston, Massachusetts; and Southfield Gardens FHA #023-44002-LDP, containing 200 units, located in Brockton, Massachusetts. Each of the aforementioned plaintiffs is a limited partnership created under the laws of Massachusetts and includes as a general partner Max R. Kargman.

 2. Defendant Carla Hills is the Secretary ("Secretary") of the Department of Housing and Urban Development ("Department") and is responsible for executing, personally and through subordinates, Section 236.

 3. The matter in controversy as to each plaintiff exceeds the sum of $10,000, exclusive of interest and costs, and arises under Section 236.

 4. Congress enacted the National Housing Act to provide adequate housing to "families with incomes so low that they could not otherwise decently house themselves . . . ." 12 U.S.C. § 1701t. Section 236 is intended to further this goal by authorizing the Secretary to make interest reduction payments to mortgagees and to insure mortgages of Section 236 projects on behalf of the owner/mortgagors. 12 U.S.C. §§ 1715z-1(a) and (j). This subsidy, commonly referred to as the "production subsidy," enables project owners to charge lower rents to the tenants, since the subsidy results in lower operating costs. In return for the benefits of interest reduction payments and mortgage insurance, the project owners are strictly regulated in the rents that they may charge and the profits that they may make. See id., §§ 1715z-1(f)(1) and (e); 24 C.F.R. § 236.55; FHA Form No. 3136, PP 4(a), (b), (c), and (l), and 6(e)(1).

 5. In 1974, Congress enacted the Housing and Community Development Act, Pub. L. 93-383, 88 Stat. 633, which added Section 236(f)(3) and amended Section 236(g) so as to provide for an "operating subsidy" -- in addition to the production subsidy -- to cover increased utility costs and local property taxes. 12 U.S.C. §§ 1715z-1(f)(3) and (g). Section 236(f)(3) provides in pertinent part:

 
"For each project there shall be established an initial operating expense level, which shall be the sum of the cost of utilities and local property taxes payable by the project owner at the time the Secretary determines the property to be fully occupied, taking into account anticipated and customary vacancy rates. At any time subsequent to the establishment of an initial operating expense level, the Secretary is authorized to make, and contract to make, additional assistance payments to the project owner in an amount up to the amount by which the sum of the cost of utilities and local property taxes exceeds the initial operating expense level, but not to exceed the amount required to maintain the basic rentals of any units at levels not in excess of 30 per centum . . . of the income of tenants occupying such units. Any contract to make additional assistance payments may be amended periodically to provide for appropriate adjustments in the amount of the assistance payments. Additional assistance payments shall be made pursuant to this paragraph only if the Secretary finds that the increase in the cost of utilities or local property taxes is reasonable and is comparable to cost increases affecting other rental projects in the community." 12 U.S.C. § 1715z-1(f)(3).

 Section 236(g) provides:

 
"The project owner shall, as required by the Secretary, accumulate, safeguard, and periodically pay the Secretary all rental charges collected in excess of the basic rental charges. Such excess charges shall be credited to a reserve fund to be used by the Secretary to make additional assistance payments as provided in paragraph (3) of subsection (f) of this section. During any period that the Secretary determines that the balance in the reserve fund is adequate to meet the estimated additional assistance payments, such excess charges shall be credited to the appropriation authorized by subsection (i) of this section and shall be available until the end of the next fiscal year for the purpose of making assistance payments with respect to rental housing projects receiving assistance under this section. For the purpose of this subsection and paragraph (3) of subsection (f) of this section, the initial operating expense level for any project assisted under a contract entered into prior to August 22, 1974, shall be established by the Secretary not later than 180 days after August 22, 1974." 12 U.S.C. § 1715z-1(g).

 6. The Housing and Community Development Act of 1974 also amended Section 236 to provide for a "deep subsidy" in addition to the production subsidy. The deep subsidy is a type of rent supplement paid to owners of projects made subject to contracts under Section 236 after August 22, 1974, generally on behalf of tenants whose incomes are too low to afford basic rentals with 25 percent of their income. 12 U.S.C. § 1715z-1(f)(2).

 7. In light of rising operating costs that were jeopardizing the viability of many projects, the Senate Banking, Housing and Urban Affairs Committee proposed the operating subsidy amendments to Section 236 specifically "to prevent excessive rent increases and assist sponsors [like plaintiffs] in meeting increases in operating costs beyond their control . . . ." S. Rep. No. 93-693, 93d Cong., 2d Sess. (1974), 3 U.S. Code Cong. & Admin. News 4273, 4302 (1974). The Committee explained:


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