BLOGS: Multifamily Focus

2008-05-20, 13:48

Garcia v. Brockway: Wait-and-See Gamble Can Be Risky for Fair Housing Plaintiffs


In a ruling significant to fair housing-related litigation, the US Court of Appeals in San Francisco, in a rare en banc (all the judges in the Circuit who aren't on "senior status") decision, has ruled that private plaintiffs have to file suit to complain about Fair Housing Act issues, including those involving design features to accommodate tenants and applicants with disabilities, within two years of the date on which the claim "accrues" -- which, in most cases, means the date of issuance of the certificate of occupancy for the property.

The plaintiffs, as well as the advocacy groups supporting them who often file their own FHA suits as plaintiffs, had argued that the time for filing was not triggered until the plaintiff "encountered" a violation by leasing or attempting to lease an apartment, but the 9-judge majority was not persuaded by this "continuing violation" concept. The three dissenting judges strongly disagreed with their colleagues, and it is not unlikely that the Supreme Court will be asked to resolve the question. As it stands now, this ruling is binding authority only in the 9 states (AK, AZ, CA, HI, ID, MT, NV, OR and WA) and two territories (Guam and the Northern Marianas) in the Ninth Circuit, but it is already being brought to the attention of judges in cases pending nationwide. Read more about these significant developments and their impact on fair housing litigation here.

(This entry was posted by Charlie Edwards, a member of the Labor and Employment practice.)

2008-05-13, 19:16

Full Ninth Circuit Court of Appeals Affirms Lower Court’s Holding in Garcia v. Brockway

By: Multifamily Real Estate Industry Team
In a case that is being closely watched in the multi-family housing industry, the Ninth Circuit Court of Appeals yesterday released its opinion affirming the lower court’s holding that the 2-year statute of limitations for a private civil action alleging violation of the Fair Housing Act’s accessibility requirements for design and construction is triggered, i.e., the violation is complete, at the conclusion of the design and construction phase, which occurs on the date the last certificate of occupancy is issued.

The plaintiffs had asserted three theories to extend the limitations period: (1) that the violation was a continuing one that did not end until the defects were corrected; (2) that the statute did not begin to run until the aggrieved person encountered the design and construction defect; and (3) that the statute did not begin to run until the aggrieved person discovered the design and construction defect.

As to the first theory, the Court said that the plaintiffs (and HUD) confused a continuing violation with the continuing effects of a past violation, and that a failure to design and construct in accordance with the FHA accessibility requirements was not an indefinitely continuing practice but instead a discrete instance of discrimination that ended when design and construction were complete.

The Court treated the second and third theories as essentially the same, and failing for the same reason --- that the FHA’s limitations period does not start when a particular person encounters, discovers, or even is injured by a housing practice, but rather the limitations period starts when there is an “occurrence or termination of a discriminatory housing practice”, 42 U.S.C.

(This entry posted by Karen Estelle Carey, a member of the Real Estate and Construction practice.)

2008-05-05, 12:05

“Dealing” with the “Early Exit”

By: Multifamily Real Estate Industry Team
Today’s uncertain market conditions are driving many institutional investors to exit from multifamily deals sooner than they originally projected. These unanticipated and premature dispositions are affecting transactions of all types, including new developments, renovation deals and straight forward acquisitions where the communities in question were initially purchased as “long term” holds.

Some institutional investors are “cashing out” of these communities because they are over-leveraged in general (and need to achieve better loan to value ratios across their portfolios). Others are either over-committed in particular market sectors or simply feel the need, given the ongoing market “melt downs,” to take immediate action to increase their liquidity. Some institutions who are facing significant losses with respect to certain investments in their portfolios, have no choice but to prematurely liquidate performing properties in an effort to offset those losses. “Earlier than expected” dispositions are also being triggered by those who are unclear about how much higher multifamily cap rates will rise in their given submarkets and are choosing to “cut their losses” by selling their communities before things get even worse.

This trend in the multifamily market place is presenting compelling challenges for the developer or fee partner (i.e., the ”promoted partner”) who typically entered into a joint venture relationship with these “early exiting” institutional investors based on an economic structure where they received a “promoted” or “profits interest” in the deal. The most meaningful compensation to be received by the promoted partner is usually paid by the joint venture at the end of a deal with a longer lifecycle. Stated differently, in these transactions (as originally conceived), the big payoff for the promoted partner usually occurs only after the community is built, rehabilitated or held for a longer period of time than the prematurely short hold periods sometimes resulting from today’s unfavorable economic environment.

The promoted partner almost always has little leverage in the negotiations of the joint venture documentation with the early exiting institutional investor. Consequently, it is unlikely that there will be any meaningfully protective provisions for the promoted partner in the governing joint venture agreement to guard against an early exit that is adverse to the promoted partner. To the contrary, most often the joint venture agreement will give the early exiting institutional investor unilateral rights to make all major decisions, including a decision to sell the property or the investors interests in the joint venture, free from any rights in favor of the promoted partner. (As everyone in real estate knows, “cash is king” and the institutional investor in the typical multifamily deal, being the “cash king,” is understandably afforded liberal rights in the joint venture agreement to protect and liquidate its disproportionate cash investment in the deal as it sees fit.) While the joint venture agreement may contain a buy/sell provision, the promoted partner is usually not well served by reliance on that provision since the outcome of any buy/sell trigger is so uncertain.

Promoted partners who are facing the scenario of an institutional investors’ unexpected and premature forced sale of a community should consider an approach that takes the parties outside of the four corners of the (less than favorable) joint venture agreement. In other words, the promoted partner should develop a “term sheet” for negotiating a new informal deal with the institutional investor that, at a minimum, gives the promoted partner time to find an alternative investor for the community in question. This term sheet might also include rights in favor of the promoted partner to make an offer to purchase the community at a price that is below the institutional investor’s perception of “market” or at a price that matches a third party offer for the property (similar to a right of first refusal), but that eliminates a feasibility period (since the promoted partner is familiar with the asset) and includes a “quicker close” than the institutional investor might achieve in the current market. The specifics of this informal new deal must be developed and tailored to the specific asset in question and inclusive of terms that are responsive to the particular needs of the institutional investor that are driving its decision to trigger an early exit from the community.

The early exiting institutional investor may be receptive to this approach since the interests of the promoted partner and the investor are aligned from the standpoint that the investor wants to find a way out of the deal and the promoted partner wants to preserve its position in the deal by finding a replacement for the institutional investor. By cutting a new deal with the promoted partner, the institutional investor may also avoid the headaches of having the promoted partner trigger its buy/sell rights at an inopportune time, creating delays and other headaches for the institutional investor that might have a chilling effect on the sale. Further, if the relationship between the promoted partner and the institutional investor is a good one, the institutional investor may be inclined to work with the promoted partner to achieve the investor’s exit from the community in a manner that is mutually satisfactory for both parties involved so as to preserve the relationship (and the pipeline of deals the promoted partner brings to the institutional investor) for the future and at a time when the real estate cycle becomes more favorable.

(This entry posted by Pamela V. Rothenberg, a member of the Real Estate Development group.)
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