HUD Posts New Sexual Orientation/Gender Identity Rules

On October 21, the Department of Housing and Urban Development issued a press release announced the agency's intention to propose regulations regarding HUD-supported rental programs and their effect on lesbian, gay, bisexual and transgender tenants and prospective tenants; see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-206. This proposal would require individuals and entities which receive grants from HUD or participate it its programs to comply with state or local sexual orientation or gender identity laws; while "clarifying" that family status discrimination protections extend to families composed of or including LGBT individuals, as well as specifying that FHA-insured mortgage qualifications cannot take sexual orientation or gender identity into account.

This initiative, highlighted by the National Multi Housing Association in their NMHC News at <http://www.nmhc.org/Content/whatsNew.cfm?cID=5459&pID=&t=c>, is extremely significant in its implications for future regulatory and legislative efforts dealing with sexual orientation in the context of fair housing. The HUD notice is careful to point out that the Fair Housing Act's prohibitions on housing discrimination do not currently apply to sexual orientation, further observing that HUD has no data on the subject other than that derived from state and local government studies such as ones which have been published in Michigan and California. However, readers should also be aware that the topic of LGBT discrimination in employment is currently under Congressional review in the Employment Non Discrimination Act (HR 3017, S 1584). Development of data by HUD will almost certainly lead to efforts to amend the Fair Housing Act, so this is an issue to watch carefully.


(This entry posted by Charlie Edwards, a member of Womble Carlyle's Labor and Employment group.)

Think Outside the Box for New Developments

Given current market conditions, developers of multifamily projects may find it difficult if not impossible to continue developing in the way that they did in the recent past. But this does not mean that it is impossible to develop new multifamily project. Rather, developers must explore new project types and reach out to different development partners to continue doing business.

Multifamilybiz.com showcases a good example in Delanco, New Jersey. Michaels Development Company, an affordable housing developer, has undertaken the first phase of mixed-use project that includes 64,000 square feet of commercial space, one-fourth of which is preleased for health care use, and 120 residential units. The developer is partnering with a church to develop the project, which is being developed on the site of a former amusement park that was owned by the church.

The project illustrates how varying funding sources and development approaches that might not have been attractive to developers in the past can be used to jumpstart projects. While these projects may present complexities beyond those that many multifamily developers are accustomed to, they also present potential benefits. Mixed-use development often is more appealing to local governmental bodies than stand alone multifamily development because it offers opportunities for smart growth and green development. Partnering with a non-profit can also unlock land that might not otherwise be available at an affordable price and also may provide an additional marketing outlet for rental units. Finally, the use of federal assistance, such as the low income housing tax credits that were used in the New Jersey project, can help bridge the financing gap and reduce the amount of developer equity that is required.

(for the full articles go to http://www.multifamilybiz.com/article.aspx?id=2129)

(This entry posted by Erica Harvey, a member of Womble Carlyle's Real Estate Development group)

Importance of an Effective Moisture Response Program in Multifamily Residential Housing

When moisture problems and apparent mold growth occur in multifamily residential housing units, landlords may become vulnerable to tenant claims, even in the absence of health concerns.

A recent California appeals court decision underscores the necessity of prompt landlord responses to water intrusion complaints under all circumstances. Jackson v. Rod Read & Sons, 2009 Cal. App. Unpub. LEXIS 4569. (www.courtinfo.ca.gov/opinions/nonpub/C058024.DOC)

The California court found that, as soon as the tenant alerted the landlord to the wet conditions in her unit, the landlord took immediate steps to remedy the situation. Accordingly, the court ruled that, although there were defects in the apartment unit, including a broken pipe, mold and water intrusion, the landlord’s actions in remediating the defects were reasonable. The court went on to find that the tenant had suffered inconvenience, but did not find that the inconvenience would constitute a breach of warranty of habitability under the circumstances.

In maintaining their multifamily housing properties, landlords must respond promptly to moisture-related tenant claims, whether or not there is apparent mold growth or any stated health concerns. Critical to this effort is the creation and implementation of a comprehensive moisture response program (MRP).

An MRP is a detailed program designed to manage and prevent moisture intrusion or infiltration. It should identify any moisture-related issues and resulting mold growth as soon as possible, and have in place a response plan that deals with incidents promptly and thoroughly.

The objective of any MRP is to integrate preventive maintenance procedures into a multifamily residential property’s existing management protocols in an effort to prevent moisture and water intrusion, avoid mold growth, and preserve the safety and value of the property.
Education is an important element to any successful MRP. If everyone associated with a multifamily property, property management and tenants alike, have an understanding of the need to promptly resolve moisture problems, health claims and law suits for water intrusion incidents should be prevented.

In this regard, it is important to remember that tenants have responsibilities. Tenants have a duty to inform their landlord of conditions inside their units of which the landlord would otherwise not be aware, such as leaking pipes or excess humidity. Tenants should be reminded that their own actions may be contributing to moisture problems and apparent mold growth. Landlords should inform tenants of actions they can take to avoid excess moisture and mold growth, such as using bathroom fans while showering, using kitchen exhaust fans when cooking, and running air conditioning units when the weather requires (particularly in hot, humid climates).

Even effective prevention programs cannot entirely eliminate moisture problems in multifamily housing units. Pipe breaks, roof leaks, sewage back-ups, overflowing tubs/sinks/toilets and HVAC condensation lines, as well as other unforeseen water intrusion events, still may occur. When these unfortunate moisture problems do happen, it is absolutely critical for a multifamily property to have and follow a mold response program so that the landlord can quickly identify and correct the cause of moisture and dry out and remediate any impacted areas. Creating and effectively implementing an MRP should ensure fewer claims and lawsuits and a satisfactory result in court, should it come to that.

(This entry posted by Erin Miller, Jim Mitchell, John Sweeney and Sky Woodward, all members of Womble Carlyle's Products Liability Litigation team)

Freddie Mac CME Program Offers Borrower-Friendly Terms

As the economic crisis and its related fallout continues to chug along, the GSE’s remain one of the main source of financing available for multifamily owners. Those in search of financing should consider Freddie Mac's new Capital Markets Execution (CME) program. CME was just launched in the last month or so. CME multifamily loans are offered on more favorable terms than Freddie's standard portfolio loans. CME loans enter a pool of loans from which Freddie sells loans to an institutional investor who securitizes the loans and then sells securitized bonds backed by the loans themselves.

Here are some specifics:

• The CME program offers better interest rates than Freddie Mac's standard loan (up to 30 basis points lower).


• The borrower may take out a Freddie Mac supplemental loan after only 12 months.
  The CME program also offers some flexibility on appraisals, as it allows for up to a 5 percent discrepancy in the appraisal amount for the property, with a commensurate reduction in the loan amount from the rate-locked amount. No breakage fees are due in such event.


• On the down side, the CME loan documents are much less flexible than Freddie Mac's standard loan documents. So, if you have a standard template of loan modifications that you previously customarily used in Freddie Mac loans for your portfolio, those will generally not be accepted under the CME program. We have been advised that material provisions of “favored” borrower’s loan documents that are critical in nature for that borrower (such as those relating to the transfer provisions) will be considered.


• Under the CME program, borrowers must be special purpose entities.


• Finally, the CME documents provide for defeasance rather than yield maintenance (after the first 2 years).
  
  

The information below is from the CME program description on Freddie Mac’s website:

Asset Type Multifamily; age-restricted multifamily, multifamily with student concentration; purpose-built student housing; cooperative housing; Section 8 HAP

Borrowing Entity Borrowers must be a SPE if the loan is $5,000,000 or more

Loan Size* $5 to $100 million (FM may permit loans as low as $3.5m in strong markets)

Loan Terms 5, 7, and 10 year

Interest-Only Period Partial Interest-Only (IO) may be approved at the sole discretion of Freddie Mac; Full Term IO not available

Minimum DCR Acquisition: 5 to less than 7 years: 1.30x; 7 to 10 years: 75% Refinance: 5 to less than 7 years: 1.30x (1.35x for cash-out refi); & 7 to 10 years : 1.25x (1.30x for cash-out refi)

Maximum LTV Acquisition: 5 to less than 7 years: 70%; 7 to less than 10 years: 75%; greater than 10 years: 80% Refinance: 5 to less than 7 years: 65%; 7 to less than 10 years: 70%; greater than 10 years: 75%;

Maximum Amortization 30 years

Amortization Calculations Actual/360 standard; 30/360 available

Lockout Period 2 years

Prepayment Provisions Yield maintenance until securitized followed by 2-year lockout; defeasance thereafter. No penalty for final 90 days. If loan is not securitized within first 2 years then yield maintenance applies for the life of the loan.

Tax & Insurance Escrow Required

Replacement Reserve Deposit Required

Recourse Requirements Non-recourse except for carve outs

Supplemental Loan Availability Yes, available 12 months after closing only with a Freddie Mac Supplemental Mortgage; refer to Supplemental Mortgage term sheet for sizing parameters

Premium Availability Buyups permitted for up to 1% of loan amount

Application Fee Greater of $2,000 or 0.1% of loan amount



Note that this product is not available for new construction projects. Freddie Mac does not offer standard construction loans; however, there is Freddie’s Conventional Forward Commitment Program, which offers forward financing for the new construction or substantial rehabilitation of multifamily conventional, non-subsidized properties. Check out a basic termsheet for this program at http://www.freddiemac.com/multifamily/termsheet_conventional-forward.html.

(This entry posted by Mark Polston, a member of Womble Carlyle's Real Estate Development group)

Apartment Defaults In the News

An interesting analysis of some of the reasons why apartment loan defaults lead other types of commercial real estate loan defaults appeared recently in an article by Ilaina Jonas with the Reuters' News Service. Among the reasons cited are:

1. Apartment building prices peaked before other types of commercial real estate (2006 vs. 2007), so deterioration has come on earlier;

2. Falling rents and occupancies have pushed down values 35 to 45 percent, and this, along with the difficulty of getting any loans, has pushed the default rate higher than for other types of assets;

3. In some markets, prices were driven up by investors planning to convert rental units to condominiums --- until the markets collapsed, and condominiums (now rental condos) down market rents;

4. While the overall U.S. unemployment rate in May was at 9.5 percent, among 18 to 24-year olds, it was 15 percent. About 70 percent of this age group are renters who are now doubling up or moving in with their parents.

None of these are new insights, certainly. From talking with people in the industry, however, it seems that the rate at which young adults are moving back home has been somewhat surprising, and the widespread availability of this option could hardly have been anticipated. It seems reasonable to anticipate, though, that once the job market begins to open up, these young people will be eager to get out on their own again --- and will create a ready market for the industry.

To read the entire article, go to http://www.reuters.com/article/businessNews/idUSTRE55G63220090617

(This entry posted by Karen Estelle Carey, a member of Womble Carlyle's Real Estate Development and Construction groups.)

Now is a Good Time to Reposition an Apartment Community

Robert A. Koch, AIA, in his May 20, 2009, “White Paper on Apartment Property Repositioning” published in Multi-Housing News, states that this is a good time for apartment owners to consider repositioning their apartment properties. Repositioning involves more than renovation; it also involves matching a property to the market in which it is located. Neighborhoods and what makes an apartment project attractive in the market can change over time.

Reevaluating a property’s positioning is not advisable at this time, it is essential. Current financial conditions have led to dramatic shifts in not only property values but the profiles of prospective tenants. The current turmoil in the financial markets has led to a decline in asset values. At the same time, former homeowners who have been displaced either by foreclosure or by abandoning homes that are under water have led to a pool of prospective tenants who have damaged credit. Foreclosures and loss of value in the residential market have created a shadow rental market for condominium units and houses that is increasing the real inventory of available rental units. Additional units are also available in fractured condominiums (i.e., condominium projects where only part of the available units have been sold) and condominium properties that have been taken off the market and offered as rental properties. These properties are likely to create downward pressure on rents and that trend is likely to continue for some time.

Property owners must face these realities and make a realistic assessment of the positioning of their properties, both where they are and where they want them to be. Only then can a property owner decide how and whether to reposition their property.

(For more information visit http://www.multihousingnews.com/multihousing/content_display/in-focus/e3i4a37a99835be851bdc1c4f4163bcc41e.)

(This entry posted by Erica Harvey, a member of Womble Carlyle's Real Estate Development group)

IS SOLAR ENERGY A VIABLE SOURCE OF ENERGY FOR YOUR MULTIFAMILY COMMUNITY?

In California, at least, the answer seems to be “yes”. Multifamily property owners may combine the benefits of that state’s Multifamily Solar Housing (Mash) program with the federal investment tax credit (ITC) to cover 70 to 80 percent of the costs of a photovoltaic electricity-generating system.

As part of the recent federal stimulus package, the ITC may be taken in the form of a grant, which increases the likelihood that installing solar panels is an economically sensible investment. The net effect of the ITC and the Mash program is that solar energy users incur per-kW-hour costs that are less than conventional utility rates.

Funds allocated to state and local governments from the federal stimulus package may also be available for the installation of solar energy systems on multifamily communities, subject to the discretion of each governmental entity receiving stimulus funds. Interested parties should check in with their state and local energy departments to find out if funds are being allocated to such projects (but don’t delay, as the funds must be spent rapidly pursuant to federal legislation).

Operators of low-income housing communities may take advantage of a 9 percent low income housing tax credit and combine it with the ITC to create a substantial reduction in the cost of installation of a solar energy system.

Even if lucrative government tax and other credits and deductions are not available for a particular project, many utility companies are offering incentives that may make solar a viable option.

(This entry posted by Mark Polston, a member of Womble Carlyle's Real Estate Development group)

Awaiting the impact of mortgage reform legislation on multi-family housing

The Congress is currently working to conference an omnibus mortgage reform and foreclosure prevention of sorts. The teeth of such legislation can be found in H.R. 1728, passed by the House on May 7th, and S. 896, passed by the Senate on May 6th. Both bills initially drew moderate attention from the multi-family industry, but it is a pair of floor amendments that became a part of the House version that has many in the multi-family industry contacting their Members of Congress.

The first of these, offered by Rep. Nydia Velazquez (D-NY) as part of a larger sundry amendment sponsored by Rep. Barney Frank (D-MA), would provide the federal government with the ability to identify “at risk” multi-family properties, initiate bankruptcy proceedings, and potentially sell said property at a lower price to an entity that agrees to convert the foreclosed multi-family property into affordable housing. (The full language, Entitled “Title IX – Multifamily Mortgage Resolution,” can be found beginning at the bottom of the second column at http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?dbname=2009_record&page=H5347&position=all) Regardless of any positive intentions, the multi-family industry is particularly concerned about the uncertainty created by the lack of clearly defined guidelines in identifying what constitutes a property as “at risk.” It should be noted that a similar amendment was offered by Sen. Charles Schumer (D-NY) and later withdrawn. It is unclear, however, whether there is enough opposition to keep such language out during a conference. Rep. Vasquez’s statement on her involvement in H.R. 1728 is available on her website at http://www.house.gov/velazquez/newsroom/2009/pr-5-7-09-predatory-lending-reforms.html.

The second amendment that has garnered the full attention of the multi-family lobby is an amendment offered by Rep. Bob Filner as part of the aforementioned Frank sundry amendment. Found here under “(c) Landlord Notice to Tenants” in the third column of http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?dbname=2009_record&page=H5345&position=all, apartment owners would be required to notify current and prospective tenants any time a property is in default or foreclosure. This would be the case regardless of individual state renter protections that already exist.

In the meantime, as your Members of Congress work to iron out language to ensure passage of a final bill aimed at mortgage reform and foreclosure prevention, organizations like the National Multi-family Housing Council have implemented a full court press on these two issues within any such legislation (http://www.nmhc.org/Content/ServeContent.cfm?ContentItemID=5236

(This entry posted by Fritz Vaughan, a member of Womble Carlyle's Government Relations team)