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Steinhorst Associates v. Preston

August 22, 2008

STEINHORST ASSOCIATES, PLAINTIFF,
v.
STEVE PRESTON, IN HIS CAPACITY AS SECRETARY OF THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, DEFENDANT.



The opinion of the court was delivered by: Henry H. Kennedy, Jr. United States District Judge

MEMORANDUM OPINION

Steinhorst Associates ("Steinhorst") brings this action against Steve Preston,*fn1 in his capacity as Secretary of the United States Department of Housing and Urban Development ("HUD"), under the Administrative Procedures Act, 5 U.S.C. 701 et seq., seeking declaratory and injunctive relief. Before the court are Steinhorst's and HUD's motions for summary judgment [##15 and 21]. Upon consideration of the motions, the oppositions thereto, and the summary-judgment record, the court concludes that Steinhorst's motion should be granted in part and HUD's motion should be denied.

BACKGROUND

A. Regulatory Background

Steinhorst's complaint implicates two HUD programs: Section 8 rental assistance, 42 U.S.C. § 1437f (2000) ("Section 8"), and the Multifamily Assisted Housing Reform and Affordability Act ("MAHRA"), 42 U.S.C. § 1437f note (2000). Congress enacted the Section 8 program in 1974 to "'aid[] low-income families in obtaining a decent place to live,' § 1437f(a), by subsidizing private landlords who would rent to low-income tenants." Cisneros v. Alpine Ridge Group, 508 U.S. 10, 12 (1993). Section 8 provides federal subsidies to private building owners who rent to low-income families. § 1437f(b). These building owners and HUD enter into Housing Assistance Payments ("HAP") Contracts, which establish the maximum monthly rent that an owner of a multifamily rental housing project is entitled to receive for each unit covered by the contract. § 1437f(c). A low-income tenant pays thirty percent of his adjusted gross income towards rent, § 1437a(1), while HUD pays the owner the difference between the HAP Contract rent and the amount the tenant is required to pay, § 1437f(c)(3).

In 1997, Congress enacted the Multifamily Assisted Housing Reform Act ("MAHRA"), which established new policies for the renewal of all Section 8 HAP contracts. § 1437f note. Upon expiration of a HAP contract, if the building owner's rent is above-market, MAHRA's provisions generally reduce the rent to market levels. Id. Requiring building owners to restructure their debt by refinancing their mortgages is one means by which MAHRA reduces rents. If a building owner has an impediment*fn2 to restructuring the debt on a Section 8 contract property, however, the property may qualify as an "exception project."*fn3 MAHRA § 524(b).

Under Option Four of HUD's Section 8 Renewal Guide and MAHRA § 524(b)(1), an exception project may renew its HAP Contract with new rents at the lesser of the rents in effect when the HAP Contract expires, as adjusted by an operating cost adjustment factor ("OCAF"), or rents established on a budget basis. Id.

On February 13, 2006, 24 C.F.R. § 401.100, titled "Which projects are eligible for a Restructuring Plan under this part?" became effective. Section 401.100(a) addresses the question "What are the requirements for eligibility?" and § 401.100 (b) addresses "When is eligibility determined?" Specifically, § 401.100(b) provides that

Eligibility for a Restructuring Plan under paragraph (a) of this section is determined by the status of a project on the earlier of the termination or expiration date of the project-based assistance contract, which includes a contract renewed under section 524 of MAHRA, or the date of the owner's request to HUD for a Restructuring Plan. § 401.100(b). In other words, when a building owner's HAP contract expires, HUD will determine whether the owner is eligible to refinance its mortgage before renewing the owner's HAP contract. If a project owner faces an impediment to restructuring at renewal, the owner qualifies as an exception project under Option Four, and the new HAP contract would allow it to charge above-market rents. If a project owner is not exempt from restructuring, the new HAP contract will establish a rent at market levels.

Before the promulgation of § 401.100, upon the expiration of a Section 8 HAP Contract that was previously renewed under Option Four, the owner was entitled to renew its HAP Contract under Option Four. Pl.'s Mot. for Summ. J. Ex. 4 (Plaintiff's Statement of Material Facts Not in Dispute ¶ 13)*fn4. Since § 401.100 was promulgated, however, when HAP contracts renewed under Option Four expire, HUD no longer automatically renews the contract under Option Four, but instead reviews the project to determine if it still qualifies as an exception project. § 401.100(b).

B. Factual Background

Steinhorst is the owner of Steinhorst Square Apartments, a 100-unit multifamily rental housing project located in Utica, New York that is managed by MB Management Company.

Pl.'s Opp'n to Def.'s Mot. for Summ. J. Ex. 7 (Pl.'s Response to Def.'s Statement of Material Facts Not in Genuine Dispute ¶ 1). Ninety-nine of Steinhorst Square's units are covered by a project-based Section 8 HAP Contract. Id. ¶ 2. Steinhorst's HAP contract was executed in two stages, effective September 7, 1981 and November 11, 1981, respectively. Pl.'s Statement of Material Facts Not in Dispute ¶ 3.

In 2001, pursuant to § 524(b)(1) of MAHRA and Option Four of HUD's Section 8 Renewal Guide -- Renewal of Projects Exempted from the Office of Multifamily Housing Assistance Restructuring (OMHAR), Steinhorst renewed its original twenty-year HAP contract for five years. Def's Mot. for Summ. J., Statement of Material Facts Not in Genuine Dispute ¶ 1. HUD determined that Steinhorst was an exception project under MAHRA § 514(b),*fn5 because it had an impediment for restructuring its debt. Id. Specifically, HUD found that because Steinhorst's financing was provided by a instrumentality of a local unit of government, Steinhorst had a prohibition on prepaying the mortgage loan before April 15, 2006. Pl.'s Opp'n to Def.'s Mot. for Summ. J. Ex.1 (Decl. of Slavet at ¶ 7). Accordingly, Steinhorst qualified as an exception project under Option Four. Pl.'s Statement of Material Facts Not In Dispute ¶ 7. A renewal HAP contract for each stage was executed in November 2001, with the contract for one stage effective on September 7, 2001, and the other effective November 12, 2001. Id. Each contract was for a five-year term. Id.

Shortly before these HAP contracts expired in 2006, HUD informed Steinhorst's management company, MB Management Company, that Steinhorst "would not automatically be considered an exception project" when the contracts were up for renewal. Pl.'s Statement of Material Facts Not In Dispute ¶ 10. Instead, HUD would determine at the time it renewed the HAP contracts whether Steinhorst was still exempt from the restructuring requirements of MAHRA § 514. HUD reiterated its position in a August 8, 2006, letter from Theodore Toon, HUD's Deputy Assistant Secretary of the Office of Affordable Housing Preservation, to Carl Coan, Steinhorst's counsel. Pl's Opp. to Def.'s Mot. for Summ. J. Ex. 5 (Toon Ltr. to Coan, August 8, 2006). Toon's letter explained that "[c]onsistent with the new Regulations [24 C.F.R. § 401.100] and [Office of Affordable Housing Preservation] Policy, Steinhorst Apartments' eligibility will be determined at the expiration of the current contract without reference or consideration give to any prior determination of exemption under Section 514(h) at the expiration of a previous contract." Id. Toon's letter also quotes from the Preamble to the regulation, published in the Federal Register:

The rule now provides that once a project has been renewed under section 524 of MAHRA, it will be renewed at the owner's request under any renewal option for which the project is eligible, except that if it is eligible for a restructuring plan under Section 401.100, HUD or [a Participating Administrative Entity] will determine whether a renewal with or without a restructuring plan is necessary.

Id. (quoting 71 Fed. Reg. 2112-01) (emphasis added by Toon).

On November 30, 2006, Steinhorst's management company requested HUD renew its HAP contracts under Option Four, retroactive to each stages' expiration dates. Decl. of Slavet ¶ 9. Pursuant to 24 C.F.R. § 401.100, HUD determined that Steinhorst was eligible for mortgage restructuring and therefore denied its request for HAP contract renewal under Option Four. Def's Mot. for Summ. J., Statement of Material Facts Not in Genuine Dispute ¶ 3. HUD denied the request for renewal under Option Four on January 17, 2007, and directed the management company to resubmit its renewal request under another option of the Renewal ...


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