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The House of Representatives has approved a major bankruptcy reform bill (H.R. 833) that includes a number of provisions affecting real estate.

Perhaps the most significant is a provision removing the debt ceiling on single-asset real estate cases. These are cases in which the real estate provides substantially all of the debtor's gross income, and the only significant business conducted by the debtor on the real estate is the operation of the property.

Mortgage lenders can get quick relief from the automatic stay against foreclosure in single-asset real estate bankruptcies, but the bankruptcy code now defines single-asset real estate as property with no more than $4 million in debt. Accordingly, many properties are excluded even though they constitute the debtor's only asset. The House-passed bill, as well as a companion bankruptcy bill approved by the Senate Judiciary Committee (S. 625), would eliminate the $4 million limit.

Both bills would also revise the provision under which the debtor, in a single-asset real estate case, can avoid foreclosure by making interest payments to the lender. The payments would have to be based on the contract rate of interest, rather than a fair market rate, as provided in the current code. Also, the change would clarify that the debtor could make the payments from any rents or other income from the project generated before or after the bankruptcy petition was filed.

The House bill would also make it harder for residential tenants to avoid eviction by filing for bankruptcy. It would allow a landlord to continue a pending action for nonpayment of rent against a tenant with a lease and to continue or initiate action against a tenant who remains in occupancy after expiration of a lease.

Advocating a cap increase Advocates of the low-income housing tax credit are continuing to push for an increase in the limit on credits that states can allocate, but the outlook remains murky because of the confusing budget situation. Currently, states are allowed to issue $1.25 per capita in tax credits each year to support the construction or rehabilitation of low-income housing. Tax credit projects must set aside at least 20% of the units for tenants with incomes no higher than 50% of area median income or at least 40% of the units for tenants making no more than 60% of area median income.

Supporters of an increase in the cap got a boost when Florida Senators Connie Mack (R) and Bob Graham (D) introduced a bill (S. 1017) to raise the cap to $1.75 in calendar 2000 and index it for inflation in future years. Identical legislation (H.R. 175) was introduced earlier this year in the House by Reps. Nancy Johnson (R-Conn.) and Charles Rangel (D-N.Y.).

Backers of the cap increase hope to add it to major tax reduction legislation which GOP leaders are expected to push this year. However, the fate of any tax cut is in doubt because of strong opposition from congressional Democrats and the Clinton Administration.

Ironically, the growing federal budget surplus, which should have eased pressures on tax and spending matters, has, if anything, made decisions even harder. All sides are adamant about preserving the surplus to protect Social Security, and they are reluctant to revise the tough 1997 budget agreement.

A key element of the 1997 accord was tight limits on discretionary federal spending, and the initial allocations of fiscal 2000 funding authority to the appropriations subcommittees show just how strict those limits are.

In the House, the subcommittee with jurisdiction over the U.S. Department of Housing and Urban Development (HUD) received an 8% cut from the fiscal 1999 funding level, while its Senate counterpart took a 13% hit. Since those subcommittees are also responsible for other federal agencies, including the Department of Veterans Affairs (VA), the National Aeronautics and Space Administration (NASA), and the Environmental Protection Agency (EPA), HUD programs could face even deeper cuts.

Fraud concerns The Department of Housing and Urban Development Office of Inspector General (OIG) has issued a fraud alert for Federal Housing Administration-insured multifamily projects, indicating concern about the misuse of project funds. The alert specifically warns about equity skimming, a practice in which project funds are used for excessive distributions to owners or other unauthorized payments, rather than for operating expenses, repairs and other necessary expenditures.

Such abuses can lead to physical and financial deterioration of projects and eventually to defaults and claims on the FHA insurance funds, according to the OIG.

The alert notes that equity skimming is a violation of the project regulatory agreement, which can be punished by the imposition of civil penalties equal to twice the amount of the misused funds.

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