law alert

This article is reprinted with the permission of Nixon Peabody LLP

In the early morning hours of Friday, October 21, the Senate in their consideration of the so-called minibus legislation (which includes the fiscal year 2012 Transportation, Housing and Urban Development Appropriations, Agriculture Appropriations and other measures) voted on an amendment offered by Senator Tom Coburn (R-OK) that would end rental subsidies to “slumlords.” The amendment failed 59–40 with Senator Jim Webb (D-VA) not voting. Under Senate procedures, this amendment required 60 votes to pass. This was a good thing.

Although seemingly targeting “slumlords” receiving federal rental subsidies, the amendment would have terminated rental subsidies for any owner of federally insured or assisted housing who was cited for a “life threatening condition” (which as we know can mean as little as missing batteries from a smoke detector) within the past 5 years.

In his floor statement, Senator Coburn referenced scandals, wasted federal dollars, and criminal activities—all from public reporting, i.e., television, newspapers—at public housing projects, not privately owned affordable housing, as support for his amendment. Although the amendment was mainly supported by Republicans, a few Democrats did vote for it.

Unfortunately, there will be more discussion in the Senate next week about similar amendments. Coburn Amendment 795, under consideration, would cancel funding for projects facing construction delays, and Coburn Amendment 800 would seek to reduce the Rural Development budget by $1 billion, or more than a quarter of its current funding by some measures.


The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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This article is reprinted with the permission of Nixon Peabody LLP

Late last week HUD distributed copies of its October 19, 2011, dated Notice H-2011-30 instructing HUD staff and project owners on how to use Reserve for Replacement Accounts in restructured Mark-to-Market properties. The genesis of this Notice was the ongoing discussion about the proper use of Reserve for Replacement accounts when HUD asset managers emphasize spending operating funds on project upkeep, while the Office of Assisted Housing Preservation (“OAHP”) staff have been optimizing surplus cash distributions.

The Notice generally discusses the Mark-to-Market transaction structure and underwriting, noting that the underwriting anticipated certain expenses to be paid from the Reserve for Replacement account. In essence, failure or delay in paying underwritten activities from the Reserve for Replacement account leads to more operating funds used for those purposes, and that in turn leads to less surplus cash. The Mortgage Restructuring Mortgages (“MRM”), or the “soft second loans,” generated by the Mark-to-Market process are paid based on surplus cash. The Notice discusses IRS Revenue Ruling 98-34 and notes that the MRM needs to be reasonably prepayable to be considered “real debt.” This discussion ignores prior OAHP policy that the MRM is considered new debt and not replacement debt.

The Notice also contains an appeal process if an owner believes there is insufficient Reserve for Replacement funding. Specifically, an owner can ask the local HUD office to use operating income to pay for specific capital improvements. An owner can also request an increase in the monthly deposit to the Reserve for Replacement account to pay for costs not previously taken into account in the underwriting. These requests would have to be prospective and for the same fiscal year so as not to affect surplus cash in other years.

If you have any questions about this Alert, please contact Richard Michael Price at 202-585-8716 or rprice@nixonpeabody.com, or your regular Nixon Peabody LLP attorney.


The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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This article is reprinted with the permission of Nixon Peabody LLP. Originally released on Oct. 25, 2011

On September 23, Governor Cuomo signed legislation that permits the New York City Housing Development Corporation (HDC) and the New York State Housing Finance Agency (HFA) to privately place unrated bonds for the purpose of financing affordable housing projects. This law took effect immediately.

Prior to passage of this legislation, HFA and HDC could only issue bonds that had been rated by a rating agency. These bonds were generally publicly offered, and the State of New York Mortgage Agency (SONYMA), Fannie Mae or Freddie Mac, or other financial institutions typically provided credit enhancement. Other issuers in New York State, such as Industrial Development Agencies (IDAs), have long had the power to issue unrated bonds, which were then purchased by a financial institution. The new law permits HFA and HDC to issue unrated bonds for private placement as an alternative form of financing for the development and preservation of affordable housing.

Under this structure, the real estate credit risk is assumed by the financial institution that purchases the bonds. The direct purchase structure should reduce transaction costs substantially, as it eliminates the need for involvement of the rating agencies, underwriters, and credit enhancers. Some financial institutions may elect to continue to seek credit enhancement from Fannie or Freddie for certain types of transactions, but the new law provides a mechanism through which HFA and HDC would still be able to issue bonds were Fannie and Freddie to cease providing credit enhancement.

The direct purchase option could not come at a better time, with the New Issue Bond Program (NIBP) expiring on December 31, 2011. The NIBP program has been enormously popular and successful in New York State, and has facilitated dozens of transactions over the past two years. It is hoped that the private placement option will facilitate some transactions that may have been structured as NIBP deals, but are not positioned to close before the end of this year.


The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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This article is reprinted with the permission of Nixon Peabody LLP

10/17/2011 – This Affordable Housing Alert addresses the recently enacted New York state law that allows municipalities to adopt local laws providing real property tax exemption to certain affordable housing projects including mixed use projects.

The newly enacted New York Real Property Tax Law (“RPTL”) Section 421-m allows municipalities outside of New York City and Nassau, Rockland, and Westchester Counties to adopt a new tax exemption. The real property tax exemption can be for the construction or substantial rehabilitation of multiple dwellings where at least twenty percent (20%) of the units are occupied by individuals or families whose incomes do not exceed 90% of AMI. If adopted locally, the exemption will apply to general municipal taxes, special ad valorem levies, and school taxes (if the applicable school district also opts to grant the exemption), but not to special assessments.

The exemption begins at 100% of the applicable taxes and phases out over a term of 20 years as follows:

During construction/rehabilitation period (maximum of 3 years)—100% exemption

Beginning the year after construction is completed:

Years 1—12 100% exemption

Years 13—14 80% exemption

Years 15—16 60% exemption

Years 17—18 40% exemption

Years 19—20 20% exemption

However, note that RPTL Section 421-m imposes a minimum tax for each taxable year in an amount equal to the taxes paid on the subject property in the year prior to the beginning of the exemption, and the subject property cannot receive the 421-m exemption if it benefits from any other real property tax exemption.

For the exemption to apply, the project must be located in a benefit area designated by the municipality, and the construction or substantial rehabilitation of the subject property must be financed, at least in part, with grants, loans, or subsidies from a federal, state, or local agency. Also, for mixed use projects, at least 50% of the project’s square footage must be used for residential rental purposes. Construction work must commence after the local law providing for the exemption is enacted and before June 15, 2015.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.