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Legal Opinion: CIM-0105

Index: 3.600

Subject: Applic. of Boston Rent Ctrl. Laws on LIHPRHA Appraisal

October 27, 1994

Charles L. Edson, Esq.

Peabody & Brown

1255 23rd Street, N.W. Suite 800

Washington, DC 20037

Dear Mr. Edson:

I am in receipt of your letter concerning Church Park

Apartments located in Boston, Massachusetts. Your letter was

written on behalf of the owner, The United Company, a

Massachusetts limited partnership. Your letter sets forth your

position that the Low Income Housing Preservation Homeownership

Act of 1990, as amended, 12 U.S.C. Sections 4101 et seq.

(\"LIHPRHA\"), preempts certain rent control provisions of the

Rental Housing Equity Ordinance for the City of Boston (the

\"Boston Ordinance\") during the appraisal process.

With respect to the application of the Boston Ordinance on

the appraisal process for Church Park, you maintained that

Section 232 of LIHPRHA (12 U.S.C. Section 4122 ) applies during

the appraisal stage. You stated that Section 232 was a clear

expression by Congress that discriminatory State and local laws

are to be preempted for all LIHPRHA purposes. You argued that

the Department indicated in the Appraisal Guidelines,

57 Fed. Reg. 19970 (May 6, 1992), that Section 232 applies during

the appraisal process. You also argued that Sections 232(a)(2)

and (a)(4) are only logical when applied during the appraisal

stage. Next, you asserted that Section 232 preempts certain

provisions of the Boston Ordinance. You explained that certain

provisions of the Boston Ordinance are not saved by the

exceptions listed in Section 232(b). Finally, your letter

challenged a February 24, 1994 memorandum from David R. Cooper,

Assistant General Counsel, Multifamily Mortgage Division (signed

by Gains E. Hopkins) to Patricia Allen, Associate Regional

Counsel, Boston Office (the \"Boston Memorandum\"). You asked our

office to reconsider the position taken in the Boston Memorandum

and conclude that Church Park be appraised with the presumption

that it is exempt from the rent control provisions in the Boston

Ordinance.

It is our understanding from the Office of Housing that both

the owner and HUD have completed their appraisals. The issue is

whether the appraisals were conducted in accordance with LIHPRHA,

the implementing regulations, and the Appraisal Guidelines. You

attempted to frame the issue to be whether LIHPRHA preempts the

Boston Ordinance for purposes of the appraisal process. There is

no issue of preemption because HUD is not depriving the State or

local government of jurisdiction over a subject matter which the

State or local government is trying to regulate. Likewise,

neither the State nor local government is attempting to interfere

with the Department\'s administration of the LIHPRHA appraisal

process.

An examination of the doctrine of preemption makes clear

that the appraisal process is separate and apart from the issue

of preemption. Preemption becomes an issue where a State or

local law regulates a subject and that regulation interferes with

or, is contrary to, the laws of Congress. Hillsborough County,

Fla. v. Automated Medical Lab., Inc., 471 U.S. 707, 712 (1985).

The preemption occurs when a Federal entity overrides the

authority of a State or local government to exercise jurisdiction

in a particular area. Preemption is an action taken by a Federal

entity directed at a State or local government, not an action

directed at appraisers. For purposes of the appraisal process,

there is no State or local law that regulates the manner in which

the appraiser is directed by LIHPRHA to perform the appraisal.

Accordingly, there is no State or local law regulating the

LIHPRHA appraisal process to be preempted.

There is no attempt by the Department to deny the State or

the local government the authority to regulate the rents.The

Department does preempt State and local rent control in other

circumstances. For example, HUD preempts State and local rent control in
its

entirety on all subsidized housing projects that are subject to
HUD-insured or

HUD-held mortgages. See 24 C.F.R. Part 246, Subpart C. This preemption

ceases when HUD is no longer the insurer or holder of the mortgage. The

effects of this preemption of State and local rent control are not
considered

in the LIHPRHA appraisal process because Section 213(c) of LIHPRHA
requires

that the appraisal guidelines assume, among other matters, the
prepayment of

the existing federally assisted mortgage. You indicated

that HUD should deprive the State and local government of

their right to regulate rents. There is no reason for such action

by HUD because the State and the local government\'s regulation

of rents does not affect the manner in which LIHPRHA directs

the appraiser to conduct the appraisal. The requirements for

the appraisal process contained in Section 213(c) of LIHPRHA (12

U.S.C. Section 4104 (c)) are directed at how appraisers are to

conduct an appraisal and not at the State or local government.

The only reason why appraisers take into account the effects

of State or local rent control is because they are directed to do

so by Federal law, not because they are compelled to do so by

State or local law. Section 213(c) of LIHPRHA requires that the

Appraisal Guidelines, and through them the appraisers, \"assume

repayment of the existing federally assisted mortgage,

termination of the existing low-income affordability

restrictions, simultaneous termination of any Federal rental

assistance, and costs of compliance with any State or local laws

of general applicability.\" (Emphasis added.) 12 U.S.C.

Section 4104 (c). By directing appraisers to consider the costs

of generally applicable State or local laws, Congress included

those laws in the governing Federal standard for determining a

project\'s preservation value. Congress, of course, could have

directed the appraisers to disregard these costs. Such a

directive would have altered the governing Federal standard for

conducting an appraisal; it would not, however, constitute a

preemption of those State or local laws. In short, Congress is

quite capable of defining what costs should be considered in the

appraisal without requiring a preemption of State and local laws.

We believe that the underlying issue is the meaning of

\"State or local laws of general applicability\" in Section 213(c)

of LIHPRHA. Unfortunately, the resolution of this issue has been

complicated by the contention that, when the costs associated

with State and local laws adversely affect preservation value,

those laws must be preempted under the preemption of State or

local laws provisions of Section 232 of LIHPRHA. Section 232

provides:

\"(a) In General.\--No State or political subdivision of

a State may establish, continue in effect, or enforce any

law or regulation that\--

\(1\) restricts or inhibits the prepayment of any

mortgage described in section 229(1) (or the voluntary

termination of any insurance contract pursuant to

section 229 of the National Housing Act) on eligible

low income housing;

\(2\) restricts or inhibits an owner of such housing

from receiving the authorized annual return provided

under section 214;

\(3\) is inconsistent with any provision of this

subtitle, including any law, regulation, or other

restriction that limits or impairs the ability of any

owner of eligible low income housing to receive

incentives authorized under this subtitle (including

authorization to increase rental rates, transfer the

housing, obtain secondary financing, or use the

proceeds of any of such incentives); or

\(4\) in its applicability to low-income housing is

limited only to eligible low-income housing for which

the owner has prepaid the mortgage or terminated the

insurance contract.

Any law, regulation, or restriction described under

paragraph (1), (2), (3), or (4) shall be ineffective and any

eligible low-income housing exempt from the law, regulation,

or restriction, only to the extent that it violates the

provisions of this subsection.

\(b\) Effect.\--This section shall not prevent the

establishment, continuing in effect, or enforcement of any

law or regulation of any State or political subdivision of a

State not inconsistent with the provisions of this subtitle

such as any law or regulation relating to building

standards, zoning limitations, health, safety, or

habitability standards for housing, rent control, or

conversion of rental housing to condominium or cooperative

ownership, to the extent such law or regulation is of

general applicability to both housing receiving Federal

assistance and nonassisted housing. This section shall not

preempt, annul, or alter any contractual restrictions or

obligations existing before the date of the enactment of the

Cranston-Gonzalez National Affordable Housing Act that

prevent or limit an owner of eligible low-income housing

from prepaying the mortgage on the housing (or terminating

the insurance contract on the housing).\"

12 U.S.C. Section 4122 .

We note initially that Section 232 is directed unequivocally

at the action of States or local jurisdictions, not at the

conduct of an appraiser. Section 232(a) states: \"No State or

political subdivision . . . may establish, continue in effect, or

enforce any law or regulation . . . .\" Thus, any preemption

effected by HUD should, in turn, be directed at the State or

local jurisdiction that is attempting to establish, effect, or

enforce a particular law. In the appraisal process, however,

there simply is no State or local action to preempt since State

or local governments are not attempting to regulate the LIHPRHA

appraisal process.

You have attempted to draw preemption into the appraisal

process by arguing that Sections 232(a)(2) and (a)(4) are logical

only at the appraisal stage. You contend that:

Section 232(a)(2) preempts laws which restrict or inhibit an

owner from receiving the annual authorized return \"Annual

authorized return\" is equal to 8 percent of preservation

equity. (Section 214(a) of LIHPRHA, 12 U.S.C. Section 4104(a)) under

LIHPRHA, that the annual authorized return is a function of the

appraised preservation value, and that therefore \"a local law\'s

limiting effect on an annual authorized return can only take

place during the appraisal phase of LIHPRHA.\" (Your Emphasis.)

Your argument ignores the fact that preservation value and annual

authorized return under Section 213(c) are dependent on costs of

\"State or local laws of general applicability.\" Clearly,

Congress intended that such laws of general applicability could

result in a lower annual authorized return than would apply if

the laws did not exist or were not taken into consideration.

A more logical reading of Section 232(a)(2) is that it is

intended to apply, after implementation of a HUD-approved plan of

action providing incentives, to laws that would prevent an owner

from receiving its 8 percent of equity as approved by HUD in the

plan of action. For example, if there were a generally

applicable local rent control law that would set allowable rents

based upon an assumed 7 percent return on owner investment, that

law would be considered in determining appraised value and the

amount of the owner\'s annual authorized return. HUD then would

set the rents that an owner could charge at a level that would

enable the owner to receive an 8 percent return on its

preservation equity. If a State or local jurisdiction then

attempted to reduce the owner\'s rent because the owner\'s return

exceeded 7 percent permitted by its local rent control, HUD would

preempt that law relying on Section 232(a)(2). This was

explained in the preamble to the Interim Rule, 24 C.F.R.

Part 248. 57 Fed. Reg. 11992, 11995 (April 8, 1992). The

preamble provided:

\"For example, one commenter suggested that the proposed rule

be amended to allow a State or local law which limits

owners\[\'\] rate of return and applies generally to both

federally-assisted and unsubsidized projects. HUD would

preempt such a law, finding it to be in violation of

subparagraph (a)(2) of this section. While the law is of

general applicability, it restricts and inhibits owners from

receiving the annual rate of return to which they are

entitled under Section 248.121 of this subpart. However, it

should be noted that the law would be taken into consideration

in appraising the project under Section 248.111.\" (Emphasis added.)

57 Fed. Reg. at 11995.

You argued that Section 232(a)(4) logically applies only at

the appraisal phase because it would be irrelevant at the

underwriting phase. We assume this means the phase at which HUD

determines the incentives to be provided to the owner or

purchaser for being required to maintain the project as

affordable. You point out that at this stage the project is

going to be preserved, and in reality the mortgage is never

prepaid. Your argument ignores the fact that Section 232(a)(4)

by its very terms applies at another phase, namely, when the

owner has, in fact, prepaid the mortgage or terminated the

contract of insurance. Furthermore, the language of

Section 232(a)(4) clearly suggests that it is intended to cover

owners that have had a plan of action approved under Section 218

of LIHPRHA (12 U.S.C. Section 4108), which authorizes the

Secretary to approve a \"plan of action that provides for

termination of the low-income affordability restrictions through

prepayment of the mortgage or voluntary termination of the

mortgage insurance contract.\" While this has been a rarely, if

ever, used alternative to receiving incentives, it nonetheless is

a legally authorized form of plan of action, and Section

232(a)(4) protects these owners against State or local

governments enforcing laws that apply only to such owners.

We also note that there is no reason to read the

Section 232(a)(4) preemption provision into the appraisal process

since any law that \"in its applicability to low-income housing is

limited only to eligible low-income housing for which the owner

has prepaid the mortgage or terminated the insurance contract\"

would clearly not be a State or local law of general

applicability within the meaning of Section 213(c) and,

therefore, would not be considered in the appraisal process.

In sum, the preemption provisions of Sections 232(a)(2) and

(a)(4) are more logically and appropriately directed at

circumstances when there is action by the State or local

government to preempt.

To further support your argument that Section 232 applies

during the appraisal process, you cited the Appraisal Guidelines

and stated that, by HUD\'s own interpretation, Section 232 applies

during the appraisal stage of LIHPRHA. You quoted the Appraisal

Guidelines which provide: \"any law that is encompassed by

Section 232(a) of LIHPRHA, as determined by HUD, shall not be

considered when determining the preservation value of the

property.\" 57 Fed. Reg. 19983. Clearly, when there is a law and

HUD determines that it is appropriate to preempt State or local

jurisdiction over the subject matter of that law, the appraisers

should not take the costs of an owner\'s compliance with such laws

into consideration. The above quoted provision was addressing

State and local laws in general.

The section in the Appraisal Guidelines that govern the

applicability of rent control to the appraisal process provides:

\"It is the appraiser\'s responsibility to explore fully and

reflect the effect rent control would have on the

unsubsidized value in establishing the assumptions for the

appraisals for a specific property. The appraiser is also

responsible for justifying the assumptions for the property

regarding rent control. Such assumptions must be supported

by all necessary data. The appraisers must seek other

professional opinions as needed and document their reports

accordingly. In summary, the objective of this appraisal is

to approximate the value the unregulated property would

command in the market place in the absence of any Federal

participation, but not excluding legal requirements such as

rent control.\" (Emphasis added.)

57 Fed. Reg. 19983. This objective is met by considering the

\"costs of compliance with any State or local laws of general

applicability\" under Section 213(c). This provision carries out

the intent of Section 213(c). In fact, the preamble to the

Appraisal Guidelines indicates that the Department believed it

was unlikely rent control laws would be preempted. The preamble

explains that:

\"With reference to the specific issue of rent control,

section 232(b) of LIHPRHA states that rent control laws are

not preempted if they are consistent with LIHPRHA and are of

general applicability. Therefore, the issue of preemption

should not arise very frequently in the context of laws

controlling rents.\"

57 Fed. Reg. 19977. While the Appraisal Guidelines do discuss

Section 232, the Appraisal Guidelines ultimately provide that it

is the Department\'s responsibility to determine whether a State

or local law is subject to Section 232. The Department has

determined that during the appraisal process, State and local

laws would not be preempted due to the mandate in Section 213(c)

that appraisers determine the costs of compliance with any State

or local laws of general applicability.

In discussing the reasons for preempting the Boston

Ordinance, you asserted that you know of no federally assisted

housing except LIHPRHA-eligible projects that may prepay its

mortgage. This is not the correct standard for determining

whether a State or local law is \"generally applicable\" under

Section 213(c). For purposes of the appraisal under

Section 213(c), we explained in the Boston Memorandum that the

appropriate standard for determining whether a State or local law

is of general applicability depends on whether the law in

question applies to housing that is not LIHPRHA-eligible, but is

similarly situated to the projects being appraised. A comparison

must be made between the law that would have been applied to

LIHPRHA-eligible projects, had LIHPRHA not been enacted, and the

law that is applied to housing that is similarly situated.

LIHPRHA-eligible projects, by definition, receive some sort of

Federal government assistance. Had LIHPRHA not been enacted, the

owners of LIHPRHA-eligible projects could have terminated the

assistance on the projects and any accompanying use restrictions.

In appraising the LIHPRHA-eligible projects under Section 213,

the appraisers must assume that LIHPRHA had not been enacted and

that all Federal restrictions on the projects have terminated.

Thus, it is the State and local laws that do not specifically

target LIHPRHA-eligible projects that apply to housing that has

terminated its governmental assistance and restrictions that

should be considered by appraisers under Section 213(c) as being

generally applicable.

In order to make the determination of whether a law is of

general applicability, the following two questions must be

answered:

1\. What State or local laws would apply to the LIHPRHA-

eligible project if LIHPRHA had not been enacted and the

Federal assistance and restrictions on the project were

terminated?

2\. Are the State or local laws in response to question 1

also applicable to housing that is not LIHPRHA-eligible, but

is similarly situated by virtue of terminating use

restrictions?

If the answer to the second question is in the affirmative, the

law would be deemed generally applicable for purposes of the

appraisals conducted under Section 213(c).

A law that appears on its face to be generally applicable

but that in its effect singles out LIHPRHA-eligible projects for

disparate treatment is not \"of general applicability\" as that

term is used in LIHPRHA. In order for a State or local law to be

classified as generally applicable for purposes of Section 213(c),

it need not apply to all housing within a certain geographic

area. The law, however, cannot apply to such a narrow class

of housing so as to effectively single out only LIHPRHA-eligible

projects. State or local laws that on their face appear to

be generally applicable must be reviewed on a case-by-case basis

to ensure that they also are generally applicable in their effect.

In the Boston Memorandum, our office concluded that the

provisions of the Boston Ordinance that dealt with restrictions

on evictions and cooperative and condominium conversions are

generally applicable because it applied to similarly situated

housing. On further consideration, we have decided that it is

not within the Department\'s purview to decide whether a

particular State or local law is generally applicable. The

Appraisal Guidelines make clear that it is the appraiser\'s

responsibility to determine whether a law is generally

applicable, and, therefore, should be taken into consideration

when conducting an appraisal. If the appraiser has a question

regarding the general applicability of a State or local law, the

appraiser is responsible for obtaining a legal opinion from a

qualified professional. 57 Fed. Reg. at 19983. Accordingly, the

Boston Memorandum should be read only as an interpretation of the

phrase \"State or local laws of general applicability\" and not as

an authoritative statement of whether the Boston Ordinance meets

the requirements of Section 213(c).

In conclusion, in determining whether the appraisals were

performed in accordance with LIHPRHA, the regulations and the

Appraisal Guidelines, there is no issue of preemption. HUD is

not depriving the State or local government of jurisdiction over

a subject matter which the State or local government is trying to

regulate. Likewise, neither the State nor the local government

is attempting to interfere with the Department\'s administration

of the LIHPRHA appraisal process. For the reasons stated above,

we cannot agree that your letter provides a basis for the Boston

HUD Office to instruct appraisers to ignore what you describe as

the \"Discriminatory Provisions\" of the Boston Ordinance. Under

the Appraisal Guidelines, it is the appraiser\'s responsibility to

determine whether a law is generally applicable, and, therefore,

should be taken into consideration when conducting an appraisal.

I hope this letter addresses all of your concerns.

Sincerely,

Nelson A. Díaz

General Counsel