Legal Opinion: CIM-0125

Index Number: 4.500

Subject: Authority to Pay for Development Services Under DEMO/DISPO
Program

May 17, 2002

MEMORANDUM FOR: Frederick Tombar III, Acting Deputy Assistant Secretary

for Multifamily Housing Programs, HTC

FROM: John J. Daly, Associate General Counsel for Insured Housing, CI

SUBJECT: MassHousing Demonstration Disposition Program

Development Fee

This memorandum responds to your May 1, 2002 request for legal advice
about whether HUD has legal authority to pay a development fee out of
the General Insurance Fund to resident boards for services rendered by
them on projects in the Demonstration Disposition Program ("Demo/Dispo
Program") in Boston, MA which is the subject of a contract between HUD
and MassHousing (formerly known as the Massachusetts Housing Finance
Agency). As discussed more fully below, we think that the activities of
the resident boards, as described in your May 1 memorandum, that are
provided to HUD through MassHousing are activities authorized pursuant
to the statutes described below. We defer to the FHA's Comptroller's
Office for a determination about the source and the availability of
funds for payment by HUD for these services.

Authority for the Demo/Dispo Program can be found in Section 501 of the
Housing and Urban Development Act of 1970 ("HUD Act of 1970') which
provides that the Secretary "is authorized and directed to undertake
such programs of research, studies, testing, and demonstration relating
to the missions and programs of the Department as he determines to be
necessary and appropriate." Pursuant to Section 501(e), the Secretary is
authorized to carry out the functions authorized in Section 501 by
contract, and the contract may be between the Secretary and State or
local governments pursuant to Section 501(f). Section 7(i) of the
Department of Housing and Urban Development Act ("HUD Act") provides
that:

> . . . the Secretary is authorized to---
>
> > \(1\) foreclose on any property . . . . In the event of any such
> > acquisition, the Secretary may, notwithstanding any other provision
> > of law relating to the acquisition, handling, or disposal of real
> > property by the United States, complete, administer, remodel and
> > convert, dispose of lease, and otherwise deal with, such property .
> > . . .
>
> Section 207(l) of the National Housing Act ("NHA") provides, in part:
>
> Notwithstanding any other provisions of law relating to the
> acquisition, handling, or disposal of real and other property by the
> United States, [the Secretary shall also have power]{.underline}, for
> the protection of the interests of the General Insurance Fund, [to pay
> out of the General Insurance Fund all expenses or charges in
> connection with, and to deal with]{.underline}, complete, reconstruct,
> rent, renovate, modernize, insure, make contract for the management
> of, or establish suitable agencies for the management of, [or sell for
> cash or credit]{.underline} or lease in his discretion, [any property
> acquired by him under this section]{.underline} . . . . (Emphasis
> added)

Additional authority is provided in Section 203(c)(2) of the Housing and
Community Development Amendments of 1978 ("HCDA of 1978") which states:

> \(D\) COMMUNITY AND TENANT INPUT.---In carrying out this section
> \[203\], [the Secretary shall develop procedures]{.underline}---
>
> \(i\) [to obtain appropriate and timely input into disposition plans
> from]{.underline} officials of the unit of general local government
> affected, the community in which the project is situated, and [the
> tenants of the project]{.underline}; [and]{.underline}
>
> \(ii\) [to facilitate, where feasible and appropriate, the sale of
> multifamily housing projects to existing tenant organizations with
> demonstrated capacity]{.underline}, to public or nonprofit entities
> that represent or are affiliated with existing tenant organizations,
> or to other public or nonprofit entities. (Emphasis added)
>
> \(E\) TECHNICAL ASSISTANCE.---To carry out the procedures developed
> under subparagraph (D), [the Secretary may provide technical
> assistance, directly or indirectly]{.underline}, and may use amounts
> available for technical assistance under the Emergency Low Income
> Housing Preservation Act of 1987 \["ELIHPA"\], subtitle C of the Low
> Income Housing Preservation and Resident Homeownership Act of 1990
> \["LIHPRHA"\], subtitle B of title IV of the Cranston-Gonzalez
> National Affordable Housing Act \["HOPE 2"\], or this section, for the
> provision of technical assistance [under this paragraph]{.underline}.
> Recipients of technical assistance funding under the provisions
> referred to in this subparagraph shall be permitted to provide
> technical assistance to the extent of such funding under any of such
> provisions or under this subparagraph, notwithstanding the source of
> the funding.

There is authority under Section 203(k)(6) of the HCDA of 1978 which
states:

> PROJECT SALE DEMONSTRATION.--- The Secretary may carry out a
> demonstration to test the feasibility of disposing of troubled
> multifamily housing projects that are owned by the Secretary through
> the establishment of partnerships with public, private, and nonprofit
> entities.
>
> Section 204(a) of the Departments of Veterans Affairs and Housing and
> Urban Development, and Independent Agencies Appropriations Act, 1997,
> ("FY 1997 Appropriations Act) provides:
>
> FLEXIBLE AUTHORITY FOR MULTIFAMILY PROJECTS.---During fiscal year 1997
> and fiscal years thereafter, [the Secretary may manage and dispose of
> multifamily properties owned by the Secretary]{.underline}, including,
> for fiscal years 1997, 1998, 1999, 2000, and thereafter, the provision
> of grants and loans from the General Insurance Fund (12 U.S.C. 1735c)
> for the necessary costs of rehabilitation, demolition, or construction
> on the properties (which shall be eligible whether vacant or
> occupied), and multifamily mortgages held by the Secretary [on such
> terms and conditions as the Secretary may determine, notwithstanding
> any other provision of law]{.underline}. (Emphasis added)

A key point is that the Demo/Dispo Program involves a unique set of
goals and procedures. A notice appeared in the Federal Register on
September 16, 1993 at 58 FR 48528 to announce the demonstration under
the authority in Section 501 of the HUD Act of 1970. The notice stated
that the Demo/Dispo Program was designed "for the purpose of developing
innovative methods for disposing of HUD-owned multifamily projects"
through agreements between HUD and State housing finance agencies
("SHFAs"). The notice also stated that:

> The demonstration program is designed to afford the SHFAs broad
> latitude in handling the proposed inventory;
>
> The Department wants to encourage the use of innovative techniques
> under this demonstration; and
>
> Possibly, SHFAs will engage in subcontracting in conjunction with
> management and sales responsibilities.

Therefore, the Demo/Dispo Program specifically contemplated the use of
innovative techniques that otherwise might not be authorized.

To carry out the demonstration, HUD entered into a contract on April 11,
1994 with MassHousing for the management and the disposition of
multifamily properties in the Demo/Dispo Program. Section 3.3 of the
contract requires that MassHousing submit development budgets for each
project and provides a procedure for HUD to review and approve the
development budgets. Your memorandum indicated that HUD has approved the
development budget submitted by MassHousing for each project in the
Demo/Dispo Program, including the payment of development fees to
resident boards. Your memorandum also identified the types of services
rendered by resident boards, including construction oversight,
contracting and procurement, tenant relocation, contract administration,
and the organization and formation of purchaser entities.

The sales of several projects in the Demo/Dispo Program are scheduled to
close in the next few months.[^1] The development fees would be paid to
resident boards at the time of sale. As indicated in your memorandum, we
think the Office of Housing should ensure that MassHousing certifies to
HUD about the type and the cost of the services provided to HUD by
MassHousing through its subcontract with a resident board and that the
Office of Housing approves a voucher submitted by MassHousing for these
services before making funds available to pay MassHousing for these
services. Mass Housing then would be responsible for making payments
pursuant to its subcontract with a resident board.

The statute provisions described above (i.e., Section 501 of the HUD Act
of 1970, Section 7(i) of the HUD Act, NHA Section 207(l), Section 203(c)
of the HCDA of 1978, and Section 204(a) of the FY 1997 Appropriations
Act) authorize HUD to carry out, or enter into agreements with other
parties or entities (e.g., MassHousing) to carry out, the development
activities that are described in your memorandum.[^2] For a
determination about the appropriate source and the availability of funds
for payment of development fees described in vouchers from MassHousing
that have been approved by HUD, you should consult with the FHA
Comptroller's Office. Although unlikely, there may be some funds
available from appropriations, if any, under Section 501 of the HUD Act
of 1970 or under one of the authorities cited in Section 203(c)(2)(E) of
the HCDA of 1978. The NHA provides an alternative source of funds. As
indicated above, NHA Section 207(l) provides that "the Secretary shall
also have the power . . . to pay out of the General Insurance Fund all
expenses or charges in connection with, and to deal with . . .or sell
for cash or credit . . .any property acquired by him under this section
. . . ."[^3] We understand that the projects in the Demo/Dispo Program
were acquired by HUD under NHA Section 207. Use of funds from the
General Insurance Fund ("GIF"), however, is subject to requirements in
NHA Section 1 which provides, in part, that:

> . . . notwithstanding any other provisions of law except provisions of
> law hereafter enacted expressly in limitation hereof, all expenses of
> the Department of Housing and Urban Development in connection with the
> examination and insurance of loans or investments under any title of
> this Act, all properly capitalized expenditures, and other necessary
> expenses not attributable to general overhead in accordance with
> generally accepted accounting principles shall be considered
> nonadministrative and payable from funds made available by this Act, .
> . . . Except with respect to title III, for the purposes of this
> section, the term "nonadministrative" shall not include contract
> expenses that are not capitalized or routinely deducted from the
> proceeds of sales, and such expenses shall not be payable from funds
> made available by this Act.

In other words, a contract expense must be deductible from sale proceeds
or a capitalized expenditure in order for payment of that expense to be
made from an FHA insurance such as the GIF or SRIF. If a contract
expense described in NHA Section 1 does not satisfy this test, an
alternative source of funds for payment of the expenditure would be from
the annual appropriation for "administrative contract expenses"
necessary to carry out programs under the GIF and the SRIF. A
determination about whether an expenditure for the services described in
your memorandum are deductible from sale proceeds or capitalized
expenditures requires expertise that can be provided by the FHA
Comptroller's Office; consequently, we refer you to that office for such
a determination.

The legal advice in this memorandum is limited to the facts presented in
your May 1 memorandum and to the unique circumstances of the Demo/Dispo
Program. This legal advice also is subject to revision in the event of
any changes to applicable statutes or regulations. Please contact
Michael Collotta at ext. 5249 or Monica Jordan at ext. 5244 if you have
any questions or desire further assistance.

Attachment

cc:

Weidenfeller 10110\
Daly 9226

Potts 9230

Collotta 9230

Jordan 9230

Culpepper 1AC

Collotta 05/10/2002

H:\\GIM\\Tombar memo.Doc

REVISED:JJDaly:jjd 05/16/2002 202-708-1274

H:\\GIM\\Tombar memo-Revised.Doc

REVISED:JJDaly:jjd 05/17/2002 202-708-1274

H:\\GIM\\Tombar memo-Revised-Two.Doc

CONCUR:

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Jordan Potts Collotta

[^1]: We have not received information that we have requested about
    projects in the Demo/Dispo Program. See May 10, 2002 memorandum from
    the General Counsel (copy attached). As soon as possible, send us
    written information on each project about what remains to be done
    (by whom and when) and your anticipated closing dates so OGC can
    make necessary preparation to provide legal support for these
    activities. This information should be updated for us each month.

[^2]: Your memorandum described resident boards as having consulted, or
    contracted, with attorneys concerning oversight of the construction
    phase as well as development related services. Your memorandum also
    stated that HUD will not approve any voucher submitted by
    MassHousing for a development fee that includes any resident board
    attorney fees. We agree with this statement because the approval of
    the General Counsel must be obtained prior to any procurement of
    legal services to be provided by a private attorney. We are not
    aware that such approval has been given.

[^3]: We note that the authority in Section 207(l) applies to projects
    under the Special Risk Insurance Fund ("SRIF") pursuant to NHA
    Section 238(a)(2).