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Court rebuffs owners of low-income housing project Low-income housing owners suffered a setback in the U.S. Court of Federal Claims when Judge James F. Merow rejected their contention that the federal government breached their contractual rights by imposing restrictions on their ability to prepay their mortgages and terminate affordability requirements.

The case, Greenbrier v. United States, was the latest of several considered by the claims court involving Federal Housing Administration-insured Section 221(d)(3) below-market-interest-rate (BMIR) and Section 236 projects.

Under the original program terms, owners were allowed to prepay their mortgages after 20 years without having to get permission from the U.S. Department of Housing and Urban Development (HUD). The regulatory agreement between HUD and the project owner required the owner to maintain low-income affordability as long as the FHA mortgage insurance remained in force, so prepayment of the mortgage would also end the affordability restriction.

Low-income housing faces setbacks Owners have now lost two of three decisions on right to prepay Section 221(d)(3), 236 mortgages.

As the owners saw it, they had a contract with the government in which they would provide affordable housing for 20 years in exchange for the right to prepay the mortgage and convert the housing to other uses after 20 years.

As the end of the 20-year lockout period for many projects approached, however, Congress became concerned about the potential loss of thousands of units of low-income housing. Restrictions on prepayment rights were imposed in the Emergency Low-Income Housing Preservation Act of 1987 (ELIHPA) and the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA), and owners, predictably, sued.

One obstacle to suing the federal government, however, is that the government has to waive sovereign immunity and consent to be sued. A contract with the government can provide that waiver, and the owners in these cases argued that that's exactly what they had.

Legally, though, it isn't quite that simple. The prepayment right was included in the mortgage note executed by the owner and lender, while the affordability requirement was part of the regulatory agreement between HUD and the owner. HUD wasn't a party to the note.

The owners took the position that the note and regulatory agreement effectively created a three-party contract among HUD, the lender and the owner, and that the prepayment restrictions in ELIHPA and LIHPRHA breached that contract.

One claims court judge agreed with the owners, ruling in Cienega Gardens v. U.S. that they were entitled to damages for breach of contract. Merow, however, is the second judge on the court to rule for the government, agreeing with a previous decision, Lurline Gardens v. U.S., that the owners had no contract with the government covering prepayment rights.

The government has appealed the Cienega Gardens decision to the U.S. Court of Appeals for the Federal Circuit, which is expected to clear up the disagreement.

Housing project for homeless won't qualify for tax credit A renovated single-room-occupancy (SRO) hotel to be operated as a transitional housing project for the homeless won't qualify for low-income housing tax credits, according to an Internal Revenue Service (IRS) private letter ruling (PLR 9811020).

A private letter ruling applies only to the specific case covered by the ruling and can't be cited as precedent. However, it can indicate IRS thinking on particular issues.

In this case, a partnership planned to operate the project for homeless individuals needing immediate shelter. They would stay in the project for a matter of days, with no leases to be signed.

Under the tax code, tax-credit units can't be used on a transient basis. An SRO unit can avoid being classified as transient housing if it is rented on a month-to-month basis. In this case, however, since there is no requirement for a minimum stay of one month, the IRS concluded that the project wouldn't satisfy that exception. Accordingly, it wouldn't meet the requirements for the tax credit.

Section 236 project owners may retain excess income Owners of FHA-insured Section 236 projects may receive HUD approval to retain "excess" rent if they agree to use the funds for certain purposes. Excess rent is any amount paid by tenants that exceeds the basic rent, which is the rent based on a 1% mortgage.

Funds may be used for shortfalls in operating costs - including the cost of repairs; future repairs, including deposits to the reserve for replacements; service coordinators; neighborhood networks; and enhanced supportive services for the elderly.

Owners won't be allowed to retain excess income if they owe HUD excess income from prior periods, they are subject to administrative sanctions or they haven't complied with HUD requests to take corrective actions.

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