--------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
  [Link to CIM-0105](http://www.hud.gov/offices/adm/hudclips/lops/CIM-0105LOPS.doc)       [[Link to                                                                               [[Link to                                                                               [[Link to
                                                                                          CIM-0106]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/CIM-0106LOPS.doc)   CIM-0110]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/CIM-0110LOPS.doc)   GHM-0045]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0045LOPS.doc)

  [[Link to                                                                               [[Link to                                                                               [[Link to                                                                               [[Link to
  GHM-0049]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0049LOPS.doc)   GHM-0050]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0050LOPS.doc)   GHM-0051]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0051LOPS.doc)   GHM-0061]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0061LOPS.doc)

  [[Link to                                                                               [[Link to                                                                               [[Link to                                                                               [[Link to
  GHM-0077]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0077LOPS.doc)   GHM-0084]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0084LOPS.doc)   CIM-0111]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/CIM-0111LOPS.doc)   CIM-0112]{.underline}](http://www.hud.gov/offices/adm/hudclips/lops/CIM-0112LOPS.doc)

  [Link to CIM-0113](http://www.hud.gov/offices/adm/hudclips/lops/CIM-0113LOPS.doc)                                                                                                                                                                                       
  --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------

Legal Opinion: CIM-0104

Index: 3.600

Subject: Effect of NY Rent Control Laws on LIHPRHA Appraisal

October 25, 1994

Kenneth G. Lore, Esq.

Brownstein, Zeidman & Lore

1401 New York Avenue, N.W. Suite 900

Washington, D.C. 20005-2102

Re: Tower West Apartments

New York, NY

FHA Project No. 012-11088

Dear Mr. Lore:

The purpose of this letter is to respond to your letters to

Helen Dunlap, Deputy Assistant Secretary for Multifamily Housing

Programs, and to follow up our meeting on August 1, 1994. Upon

learning that HUD was considering redoing the appraisals for

Tower West Apartments, you wrote to Ms. Dunlap on

November 12, 1993. Subsequently you wrote to Ms. Dunlap on

January 10, April 8, July 15, and August 2, 1994.

With respect to the effect of rent control on the appraisal

for Tower West Apartments, you maintained that the initial legal

regulated rents for purpose of the appraisal should be market-

level rents. You agreed with John P. Dellera\'s, then New York

Regional Counsel, conclusion that the initial legal regulated

rent is governed by Section 2521.1(l) of the Rent Stabilization

Code (the \"RSC\") which provides that the initial legal registered

rent shall be the rent last charged to the tenant in occupancy.

You explained, however, that Section 26-512(b)(3) of the Rent

Stabilization Law (the \"RSL\") interprets Section 2521.1(l) of the

RSC, which provides that for housing accommodations other than

those described in Sections 26-512(b)(1) and (2), the initial

legal regulated rent shall be the rent reserved in the last

effective lease or rental agreement. You went on to explain that

Section 26-512 must be read together with Section 26-513(a) of

the RSL, which provides in part that the owner has a right to

appeal the initial legal regulated rent where \"the presence of

unique or peculiar circumstances materially affecting the initial

legal regulated rent has resulted in a rent which is

substantially different from the rents generally prevailing in

the same area of substantially similar housing accommodations.\"

You asserted that the fact that a property which has been

restricted to below-market rents for more than twenty years is a

unique and peculiar circumstance materially affecting the initial

legal regulated rents. Thus, you indicated that since the

Project\'s rents have been held to an artificially low level far

below market level rents, the initial legal regulated rents

should be set at market levels.

Next, you asserted that the proper application of the RSC to

the appraisal of the Project would not result in a reduction of

the Project\'s preservation value as determined by the appraisers

and if it did, the applicable provisions of the RSL would be

preempted by Section 232 of the Low Income Housing Preservation

and Homeownership Act of 1990, as amended, 12 U.S.C.

Sections 4101 et seq. (\"LIHPRHA\"). Lastly, you argued that HUD

was precluded from reopening the rent control and preemption

issue at this stage in the LIHPRHA approval process.

I will address the issues in the following order:

\(1\) whether the initial legal regulated rents for purposes of

determining the preservation value for the Project should be

market-level rents, and if not; (2) whether Section 232 of

LIHPRHA would preempt the applicable provisions of the RSL; and

\(3\) whether HUD is precluded from reopening the appraisal

process.

I. Initial Legal Regulated Rent Levels

The HUD Office for New York and New Jersey wrote to then

State of New York Division of Housing and Community Renewal

(\"DHCR\") Commissioner, Angelo J. Aponte, in an effort to

determine the effect of the RSL and the RSC upon the appraisals

for the Project. To summarize, Commissioner Aponte indicated in

his response that the initial legal regulated rent would be

determined to be the last rent charged to and paid by the tenant

before prepayment and termination of the Federal assistance.

Furthermore, Commissioner Aponte explained that the initial legal

regulated rent could be adjusted after taking into consideration

all factors bearing upon the equities involved. The conclusion

reached by Commissioner Aponte that the initial legal regulated

rents should be a fair market rent, however, was based on his

determination of the equities assuming LIHPRHA would be in place

rather than as required by LIHPRHA that the mortgage had been

prepaid and all Federal assistance had been terminated.

Commissioner Aponte indicated in his letter \"that the

appraised rents of such housing accommodations would be

established at the fair market rent of comparable unassisted

housing accommodations.\" Commissioner Aponte explained, assuming

the jurisdictional prerequisites (generally, presence of six or

more units and constructed prior to January 1, 1974) were met,

the rents in such projects would be regulated in accordance with

the RSC. He indicated that under Section 2521.1(l) that the

initial legal regulated rent would be determined to be the last

rent charged to and paid by the tenant:

\"For housing accommodations which rentals were

previously regulated under the PHFL \[the Mitchell-Lama

law\], or any other state or federal law, other than the

RSL or the City Rent law, upon the termination of such

regulation, the initial legal registered rent shall be

the rent charged to and paid by the tenant in occupancy

on the date such regulation ends. For housing

accommodations which are vacant on the date the

building first became subject to the RSL and this Code,

such rent shall be the rent charged and paid by the

most recent tenant, in addition to rental subsidies, if

any, which shall be subject to vacancy guidelines

increases, and shall not be subject to a Fair Market

Rent Appeal pursuant to section 2522.3 of this Title.\"

Commissioner Aponte noted that the RSC, under

Section 2522.7, also maintained flexibility in the setting of

first rents by taking into consideration the equities involved.

Section 2522.7 states:

\"In issuing any order adjusting or establishing any

legal regulated rent, or in determining any

applications by tenants pursuant to section 2523.5(f)

of this Title (Renewal Lease Rights Determinations), or

in determining when a higher or lower legal regulated

rent shall be charged pursuant to an agreement between

the DHCR and governmental agencies or public benefit

corporations, the DHCR shall take into consideration

all factors bearing upon the equities involved, subject

to the general limitation that such adjustment,

establishment, or determination can be put into effect

with due regard for protecting tenants and the public

interest against unreasonably high rent increases

inconsistent with the purposes of the RSL, for

preventing imposition upon the industry of any

industry-wide schedule of rents or minimum rents, and

for preserving the regulated rental housing stock.\"

(Emphasis added.)

Commissioner Aponte explained that it would be appropriate to

take into account the equities involved in the context of

prepayment under the LIHPRHA program in establishing the initial

legal regulated rents. Commissioner Aponte considered the

following factors:

\(1\) whether or not the tenants are protected from

unreasonably high increases in initial rents;

\(2\) whether or not the physical condition of the

property will be preserved;

\(3\) whether or not the property will remain preserved

as affordable housing; and

\(4\) whether or not the property will receive increased

federal or other governmental assistance.

Commissioner Aponte determined when the above factors are

affirmatively present because the Project will be subject to

continued supervision under the LIHPRHA program, that the initial

legal regulated rents should be set in the same manner as when a

vacancy occurs in an apartment subject to the Rent Control Law

(\"RCL\") and such unit transfers from the more strict Rent Control

system to the less restrictive Rent Stabilization system.

Section 2521.1(a)(1) of the RSC provides:

\"For Housing accommodations which on March 31, 1984,

were subject to the City Rent Law, and became vacant

after that date, and which are no longer subject to the

City Rent Law, and are rented thereafter subject to the

RSL, the initial legal registered rent shall be the

rent agreed to by the owner and the tenant and reserved

in a lease or provided for in a rental agreement

subject to the provisions of this Code, provided that

such rent is registered with the DHCR pursuant to Part

2528 of this Title \[footnote omitted\] (Registration of

Housing Accommodations), and subject to a tenant\'s

right to a Fair Market Rent Appeal to adjust such rent

pursuant to section 2522.3 of this Title.\"

Consequently, Commissioner Aponte concluded that the initial

legal regulated rents pursuant to the RSC should be a fair market

rent, subject to subsequent guidelines and other lawful

increases.

In an October 15, 1993 response to a request from

Mr. Martin Sckalor of the HUD New York Office asking whether

appraisals that are made to determine the preservation value of

the Project under LIHPRHA should be based upon market-level rents

in the area or upon the below-market rents, John P. Dellera, then

New York Regional Counsel, concluded that the initial legal

regulated rents should be the below-market rents. Mr. Dellera

asserted that the RSL applies to housing accommodation whose

rentals were previously regulated under the Mitchell-Lama law, or

any other State or Federal law. Once subject to the RSL, the

initial legal registered rent would be set at the rent level

charged to the tenant in occupancy on the date regulation under

the other State or Federal law ends.

On December 23, 1993, Mr. Dellera wrote to Gary Turk, Deputy

Counsel, DHCR, to ask whether the RSL authorizes an adjustment of

the initial legal regulated rents for former Mitchell-Lama

projects which have become subject to Rent Stabilization. In a

January 27, 1994 response, the Deputy Counsel stated that initial

legal regulated rents could not be adjusted. The Deputy Counsel

made clear that his opinion letter did not represent an official

agency determination and it was non-binding on the Office of Rent

Administration. He explained that an official determination may

be issued only at such time as a DHCR proceeding has been

instituted and all affected parties have been afforded notice in

accordance with agency rules and procedures. Subject to this

disclaimer, the Deputy Counsel concluded that the initial

regulated rent for former Mitchell-Lama projects should be the

rent reserved in the last effective lease or other rental

agreement. In other words, the initial legal regulated rent

should be the rent charged to and paid by the tenant in occupancy

on the date the Federal regulation terminates. The Deputy

Counsel stated that it was the DHCR\'s position that the initial

legal regulated rents established pursuant to Section 2521.1(l)

of the RSC are not subject to challenge or appeal by either

tenants or owners, but that owners would be eligible to apply for

hardship increases under Sections 2522.4(b) or (c) of the RSC.

As indicated above Commissioner Aponte determined that

because the equitable factors he listed would be affirmatively

present, the initial legal regulated rents should be set in the

same manner as when a vacancy occurs in an apartment subject to

the RCL and such unit transfers from the more strict Rent Control

system to the less restrictive Rent Stabilization system.

Commissioner Aponte\'s opinion indicates that, in the absence of

these equitable factors, the initial regulated rent upon

prepayment of the mortgage would be determined to be the last

rent charged to and paid by the tenant.

We do not question Commissioner Aponte\'s interpretation of

the RSL and RSC, which clearly is a matter within the DHCR\'s

competence and outside ours. Commissioner Aponte\'s conclusion

that his stated equitable factors were affirmatively present,

however, is clearly based on a misunderstanding of the

assumptions that Federal law imposes on the preservation

appraisal process. The only indication in Commissioner Aponte\'s

letter why any of the enumerated factors would be present is in

the reference to \"the setting of the rents in a development that

will be subject to the continued supervision under the LIHPRHA

program\" (emphasis added). But this assertion of continued

supervision under LIHPRHA is clearly at odds with Section 213(c)

of LIHPRHA\'s instruction to assume repayment of the existing

federally-assisted mortgage, termination of the existing low-

income affordability restrictions, and simultaneous termination

of any Federal rental assistance. As a result, there is still a

question about the amount of the initial legal regulated rents

for the Project for purposes of determining the preservation

value under LIHPRHA. Consequently, Ms. Dunlap wrote to Donald M.

Halperin, the current DHCR Commissioner, seeking clarification

from Commissioner Halperin of the appropriate standard for

setting the initial legal regulated rents, taking into account

the correct LIHPRHA assumptions, namely that the mortgage has

been prepaid and all Federal assistance has been terminated.

II\. Laws of General Applicability and Preemption

In your letters, you argued that the RSL would not result in

a reduction of the Project\'s preservation value, i.e. setting

rents at the rent last charged to the tenant prior to prepayment

and termination of Federal assistance, and if it did, the

applicable provisions of the RSL would be preempted by Section

232 of LIHPRHA. Section 213(c) of LIHPRHA requires, in

determining a project\'s preservation value, that appraisers

\"assume repayment of the existing federally-assisted mortgage,

termination of the existing low-income affordability

restrictions, and costs of compliance with any State or local

laws of general applicability.\" You contended that a law which

targets Federally- or State-assisted projects, or both, for

special adverse treatment is not a law of general applicability.

You also asserted that laws which are not limited solely to

Federally-assisted projects, but which are targeted to a very

limited universe of low-income projects that includes both

Federally-assisted and certain State-assisted low-income projects

and which do not apply to the great majority of multifamily

rental projects, are preempted under Section 232 of LIHPRHA.

You, therefore, concluded Section 2521.1(l) of the RSC, which

applies only to Federally- and State-assisted projects comprising

a very small percentage of multifamily housing stock, is not a

law of general applicability and is preempted.

It is our position that applying State and local laws \"of

general applicability\" during the appraisal process in

Section 213 of LIHPRHA is separate and apart from not preempting

State and local laws \"of general applicability\" under Section 232

of LIHPRHA. We read the two statutory provisions separately and

believe that each statutory provision is intended to accomplish a

different purpose as is discussed below. The sole test of

whether the cost of compliance with a particular State or local

law should be considered by appraisers under Section 213 is

whether the law is of general applicability.

A. Laws of General Applicability

Appraisers of LIHPRHA properties must consider the cost of

compliance with State and local laws of general applicability.

Section 213(c) of LIHPRHA requires, in determining a project\'s

preservation value, that appraisers \"assume repayment of the

existing Federally-assisted mortgage, termination of the existing

low-income affordability restrictions, and costs of compliance

with any State or local laws of general applicability.\" We

conclude 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) of LIHPRHA.

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)

of LIHPRHA, 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.

B. Preemption

As explained above, it is our position that applying State

and local laws \"of general applicability\" during the appraisal

process in Section 213 of LIHPRHA is separate and apart from not

preempting State and local laws \"of general applicability\" under

Section 232 of LIHPRHA.

Section 232 of LIHPRHA expressly preempts certain State and

local laws that are not of general applicability and that are

inconsistent with LIHPRHA. Section 232 is intended to ensure

that there is a uniform Federal preservation policy. Conf. Rpt.

No. 943, 101st Cong., 2d Sess. 460 (1990). It accomplishes this

purpose by dictating the effect of State and local laws on

implementing plans of action approved under LIHPRHA.

Section 232(a) preempts certain State or local laws that are:

inconsistent with LIHPRHA; restrict or inhibit prepayment or the

ability of an owner to receive its annual authorized return; or

are limited in their applicability to \"eligible low income

housing for which the owner has prepaid the mortgage or

terminated the insurance contract.\" Notably, prepaying the

insured mortgage, terminating the mortgage insurance contract,

receiving an annual authorized return and other incentives are

actions an owner of eligible low income housing can take only in

accordance with a plan of action approved under LIHPRHA.

Section 232, therefore, becomes relevant in the stage in the

LIHPRHA processing when a plan of action is submitted and

approved and not at the earlier stage when the appraisals are

conducted.

Section 232 is inapplicable during the appraisal process.

There simply is no State or local law to preempt. Section 213(c)

establishes the standards to be used by appraisers determining

the preservation value of eligible low income housing. By

directing appraisers to consider generally applicable State and

local laws, Congress not only declined to preempt those laws, but

decided to adopt those laws as the Federal standard for

determining a project\'s preservation value. Preemption of State

or local laws, therefore, is not appropriate under Section

213(c). The sole test to be applied by appraisers in determining

whether a particular State or local law should be considered in

the appraisal is whether the law is one of general applicability.

If a law does not meet the test of general applicability, it is

not preempted, it is merely disregarded in determining

preservation value.

III\. Reopening the Appraisal Process

With respect to the status of the HUD appraisal, as you know

Housing has contracted for an appraiser to do an appraisal to be

conducted in an expedited manner because Housing determined that

the appraisal HUD received from its first appraiser was not a

complete independent appraisal in accordance with LIHPRHA and the

Appraisal Guidelines, 57 Fed. Reg. 19970 (May 6, 1992), (the

\"Guidelines\"). The Guidelines make clear that the appraisal must

conform to the Uniform Standards of Professional Appraisal

Practice (\"USPAP\").

The Guidelines provide that the appraisals will be reviewed

by HUD staff to ensure that the Guidelines have been followed and

that all pertinent data has been considered and properly applied

in both appraisals. \"The review will address appraisal

deficiencies, such as inadequate support for conclusions, lack of

adherence to these guidelines, inconsistencies, etc.\"

57 Fed. Reg. at 19981. Housing has informed our office that

Housing Field Office staff reviewed the appraisal and notified

the appraiser of the deficiencies in a February 18, 1993, letter.

While the appraiser responded, the information was still

inadequate to ensure the reliability of the information provided

by the appraiser. The response from the appraiser did not supply

information sufficient to complete the appraisal. Hence, the

appraiser was fired.

Housing\'s review of the appraisal report prepared by the

first appraiser by the Field Office staff disclosed that the

appraiser\'s report was based upon information that was extracted

from the sponsor\'s appraisal report of August 20, 1992. The

following deficiencies in the appraiser\'s report were noted by

the Housing Field Office staff:

1\. HUD-92273, Estimates of Market Rent by Comparison.

Adjustments for size, age of buildings and location

were excessive and were not adequately supported by

data.

2\. HUD-92274, Operating Expense Analysis Worksheet.

Financial statements on expense comparables were not

provided. No adjustments were made to the expense

comparables to reflect the subject project\'s

characteristics. The subject management fee was

inconsistent with NYC management fee schedules. Also,

the trending adjustment was inaccurate.

3\. HUD-92264. There was no background information on the

sales comparables used in the Market Comparison

Approach to Value, nor was there any verification of

the subject Effective Gross Income used in the

appraisal report.

4\. Capitalization Rate. The subject cap rate reflected an

equity dividend rate that was lower than the mortgage

interest rate. This is inconsistent with standard

appraisal practice. Also, absent were any extractions

of equity dividend rates from market sales comparables.

5\. A complete analysis of project conversion costs was not

provided; nor were these costs discounted as part of

the analysis. HUD Appraisal Guidelines state that the

discounting of project conversion costs must be

calculated.

6\. A complete analysis of upgrade repairs was not

provided.

According to the Chief Appraiser of the New York Office, the

appraiser\'s report represented only an estimated one-third of the

work necessary for a complete extension preservation appraisal.

This incomplete appraisal report did not comply with HUD\'s

Appraisal Guidelines or the Appraisal Institute\'s USPAP

Standards. Accordingly, HUD does not have an acceptable

appraisal report for Tower West Apartments. Consequently, HUD

has the responsibility to recontract in order to receive a

complete independent appraisal under LIHPRHA and the Guidelines.

HUD cannot negotiate a preservation value with the owner and

agree to a Plan of Action which would require the expenditure of

Federal monies on the basis of an appraisal that did not comply

with Federal law.

Sincerely,

Monica Hilton Sussman

Deputy General Counsel