HCR-15-09-00003-A Regulations Govern Management and Supervision of Mitchell-Lama Housing Companies

11/10/09 N.Y. St. Reg. HCR-15-09-00003-A

NEW YORK STATE REGISTER

VOLUME XXXI, ISSUE 45

November 10, 2009

RULE MAKING ACTIVITIES

DIVISION OF HOUSING AND COMMUNITY RENEWAL

NOTICE OF ADOPTION

 

I.D No. HCR-15-09-00003-A

Filing No. 1224

Filing Date. Oct. 23, 2009

Effective Date. Nov. 10, 2009

Regulations Govern Management and Supervision of Mitchell-Lama Housing Companies

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:

Action taken:

Amendment of Parts 1700, 1725, 1727, 1728, 1729, 1730, 1731, 1732 and 1750, repeal of Parts 1710, 1711, 1712, 1713 and 1740, and addition of Part 1760 to Title 9 NYCRR.

Statutory authority:

Private Housing Finance Law, sections 32(3), 32-a(6) and 84(9)

Subject:

The regulations govern management and supervision of Mitchell-Lama housing companies.

Purpose:

To streamline and update the regulations to reflect contemporary management and supervision practices and current law.

Substance of final rule:

The adopted regulations alter the Mitchell-Lama Regulations in the following general manner:

I. PART 1700 - Scope and Definition

Part 1700 is amended to:

(1) Add more definitive standards governing "waivers" of the regulations;

(2) Add a provision allowing DHCR to take equitable considerations into account when making its supervisory determinations;

(3) Allow modifications to eliminate duplicative supervisory functions by other governmental agencies, in accordance with a recent amendment to the Mitchell-Lama Law;

(4) Remove original construction and design standards and delete references to the regulations as a "manual."

II. PARTS 1710 through 1713 - Subchapter B: Design Standards and Procedures for Limited-Profit and Limited-Dividend Housing Projects.

Parts 1710, 1711, 1712, and 1713 are repealed in their entirety.

III. PART 1725 - General Administration

Part 1725 is amended to:

(1) Clarify regulations governing "Identity of Interest" ("IOI") contracts;

(2) Prohibit a mutual housing company (cooperative) board member from voting on a managing agent's contract, for two years after the agent has employed a family member of that board member;

(3) Strengthen prohibitions on unauthorized payments to and from directors, including payments regarding all contracts entered into by the housing company.

IV. PART 1727 - Occupancy

Part 1727 is amended to:

(1) Incorporate references to DHCR's computerized waiting list system, known as the Automated Waiting List ("AWL"), which enables improved screening and monitoring of applicants;

(2) Require applicants to be eligible at both time of application and admission to a development and require that at least one original, adult applicant be a member of the family at the time of admission;

(3) Reduce the occupancy preference given to internal transfers from 80% to 75% of admissions;

(4) Codify existing policy waiving DHCR pre-approval for new admissions in housing developments where there is less than a one-year waiting list and a history of housing company compliance;

(5) Add a new prohibition against warehousing apartments;

(6) Eliminate the need for DHCR pre-approval for the majority of commercial leases;

(7) Increase the partial income exception regarding the calculation of admission rent and surcharges for "secondary wage earners."

(8) Revise standards for determining permissible household size by removing references to gender, age, and marital status.

(9) Permit a housing company to (a) upon proper notice of termination and, if applicable opportunity to cure, go directly to court to seek eviction of residents not entitled to occupancy, and (b) accept rent when a "succession" appeal is pending before the Division without waiving its objection to the tenant's possession.

V. PART 1728 - Budget and Fiscal

Part 1728 is amended to:

(1) Reduce the time period for DHCR review of housing company budgets in connection with a rent increase application;

(2) Eliminate the need for full budget review where the rent increase requested by a housing company is less than the Consumer Price Index (CPI).

(3) Reduce the number of required bids for purchase contracts while ensuring that minority- and women-owned businesses are included in such bidding processes;

(4) Eliminate prior DHCR approval for contracts of less than $100,000;

(5) Forestall the requirement for DHCR approval of progress payments on contracts until 75% of the contract has been paid;

(6) Require purchases and contracts for occasional repairs and maintenance (plumbing, painting, etc.) which exceed $100,000/annum to be competitively bid, even if broken up into smaller contracts;

(7) Require that all IOI contracts obtain prior DHCR approval;

(8) Enable DHCR to impose more stringent supervision on any contract, or category of contract, upon a determination that such additional supervision is necessary;

(9) Allow for less stringent provisions in the case of contracts arising from preservation agreements or private mortgage refinancing;

VI. PART 1729 - Project Management

Part 1729 is amended to:

(1) Remove the requirement that a managing agent be selected through competitive bidding when the selection is part of a housing company preservation plan;

(2) Allow managing agents to automatically renew their contracts upon housing company concurrence but without prior DHCR approval, when certain performance standards have been met;

(3) Consolidate existing remedies and add new remedies allowing DHCR to address recalcitrant management.

VII. PART 1730 - Insurance

Part 1730 is amended to:

(1) Increase liability protection to reflect and adhere to current business practices;

(2) Reduce DHCR regulation of required insurance, thus enabling the housing companies to use their business judgment to purchase the appropriate amount of insurance.

VIII. PART 1731 - Fire Prevention and Safety

Part 1731 is amended to:

(1) Reduce DHCR supervision of housing company fire prevention measures;

(2) Require housing companies to comply with all applicable fire safety standards.

IX. PART 1732 - Energy Conservation

Part 1732 is amended to:

(1) Increase housing company discretion regarding the proper energy conservation measures to take while operating the developments.

X. PART 1733 - Partnership Relations and Transfers of Interests in Rental Housing

Part 1733 was included as a new Part in the regulations proposed on April 15, 2009. However, it had already been adopted under separate rulemaking proceedings prior to the current rulemaking process and no further changes to Part 1733, as previously adopted, have been proposed under the instant Notice of Rule Making or Notice of Adoption. Therefore, Part 1733 has been removed from the text of the adopted regulations.

XI. PART 1740 - Chart of Accounts for Regulated Housing Companies

Part 1740 is repealed in its entirety.

XII. PART 1750 - Dissolution

Part 1750 is amended to:

(1) Address the effects of "reconstitution" by housing company;

(2) Require that a housing company give tenants immediate notice of any dissolution application;

(3) Require that a housing company submit a title search with any dissolution application.

XIII. PART 1760 - Redevelopment and Refinance

Part 1760 is added to:

(1) Codify procedures for housing companies to obtain DHCR approval for new financing;

(2) Enable a fast-track exception to obtaining DHCR's approval for refinancing when the new lender is a governmental source with its own loan underwriting criteria.

Final rule as compared with last published rule:

Nonsubstantive changes were made in sections 1700.2(a)(7), (13), 1725-3.1(d), 1725-3.2(a), 1725-3.5, 1725-5.3(a)(2), 1727-8.2(a), Subpart 1732-3 and Part 1733.

Text of rule and any required statements and analyses may be obtained from:

Gary R. Connor - General Counsel, New York State Division of Housing and Community Renewal, 25 Beaver Street - 7th Floor, New York, New York 10004, [phone], email: [e-mail]

Revised Regulatory Impact Statement, Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement

The Division made minor changes to the final regulations that do not have an impact on the regulatory effects of the regulations as they were originally proposed. Specifically, the agency relocated language from a definition regulation to the controlling regulation and clarified the language of regulations to properly express the purpose and intent of the revision. In addition, grammatical errors were corrected. As a result, revisions to the previously published Regulatory Impact Statement, Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement are not necessary.

Assessment of Public Comment

A Notice of Proposed Rule Making was published in the State Register on April 15, 2009. Below is an assessment of the written comments received by the agency since publication of the proposed rules and the comments presented at a public hearing held by the agency on May 27, 2009 in New York City.¹ This assessment specifies the major ISSUES raised in submissions on amendments to the Mitchell-Lama regulations, SIGNIFICANT ALTERNATIVES suggested, and sets forth the AGENCY RESPONSE with respect to such issues and proposed alternatives (which includes statements as to why any significant alternatives were not incorporated).

Issue:

The definition of "Family Member" in Section 1700.2(a)(7) of the proposal does not include grandparents, grandchildren, nieces, nephews, mother-in-law, father-in-law, brother-in-law or sister-in-law.

Significant alternative(s):

The new regulation should track the definition found in New York City's Department of Housing Preservation and Development regulation.

Agency Response:

The proposed regulation is intended to be in accord with the statutory provisions on succession of other programs that DHCR administers. As a result, the subject section has been revised to be consistent with such provisions.

Issue:

Proposed Subpart 1725-2 ("Boards and Shareholders") should require term limits for housing company board members.

Significant alternative(s):

None, other than as noted above.

Agency Response:

This issue is not a subject of the proposal. As a result, no revision of the proposed regulation Subpart will be undertaken.

Issue:

Proposed Section 1725.-3.1(d) requires that a majority of all stockholders shall constitute a quorum for purposes of any stockholders' meeting.

Significant alternative(s):

The proposed regulation should allow for a lesser percentage.

Agency Response:

The section has been revised to reflect that it applies to stockholders' meetings and to allow for a lesser quorum as set forth in BCL § 608(b), except in the case of a proposed dissolution of the housing company.

Issue:

Proposed Section 1725-3.5 is confusing. It uses the term "transcript" which appears to require a housing company to use a stenographer to prepare and submit a full transcript of each board meeting to DHCR.

Significant alternative(s):

None, other than to change "transcript" to "copy."

Agency Response:

The word "transcript" has been changed to "copy" to reflect that only the minutes of each board meeting must be provided to DHCR.

Issue:

Proposed Section 1727-1.4(d) requires that "[u]pon the request of an applicant, the housing company is obligated to advise said applicant of his or her position on the waiting list."

Significant alternative(s):

It was suggested that "[t]he waiting lists should be published by first and last name of applicant."

Agency Response:

The current process of using last names allows applicants to track their position without implicating privacy concerns. As a result, no revision of the proposed regulation will be undertaken.

Issue:

Proposed Section 1727-2.1 permits a housing company to assess a surcharge on those tenants whose annual income exceeds the limit set therein. Conversely, § 1727-5.3(a)(6) permits eviction of any tenants in such over-income status.

Significant alternative(s):

DHCR should (i) reconcile the regulations to mandate that a housing company be allowed only to assess a surcharge on over-income tenants, and (ii) remove the option allowing for the commencement of an eviction based on a tenant's income level.

Agency Response:

The proposed regulation 1727-5.3(a)(6) tracks the statutory language of the PHFL. No revision of the proposed regulation will, therefore, be undertaken.

Issue:

The standard for commencing an eviction proceeding under Section 1727.-5.3(a)(2) is too lenient.

Significant alternative(s):

The proposed regulation should permit eviction to commence only upon violation of a "substantial" provision of the corporate governing documents as well as the lease agreement.

Agency Response:

In 1727-5.3(a)(2), the word "substantial" has been added before the word "provision" to make the grounds for termination under this section consistent.

Issue:

The proposed regulations should be revised to permit or recognize co-op residents' councils.

Significant alternative(s):

None, other than as noted above.

Agency Response:

Residents' councils were intended to exist until an initial co-op board was elected by the shareholders. Having a residents' council thereafter would be redundant. Therefore, the only revision undertaken was a clarification that DHCR employees are required to be on boards only if so directed by DHCR.

Issue:

The language of Section 1727-8.2(a) is unclear and deprives the applicant of the opportunity to demonstrate actual move-in date through documentary evidence (and is, therefore, not in keeping with the anti-eviction policy underpinning the Mitchell-Lama program). A question was also raised as to when, for purposes of succession, a reduced co-residency period applied. In addition, it was noted that a clause within paragraph (2) of the section was missing language.

Significant alternative(s):

It was suggested that the new regulation should follow the decision of Renda v. DHCR, 22 A.D.3d at 383, 802 N.Y.S.2d at 656 and permit the succession applicant to demonstrate residency in the housing accommodation through other evidence and not only via the annual certification or notice of change in family. It was also suggested that the reduced co-residency period should apply to the tenant of record and not "where a family member is a senior citizen or disabled person."

Agency Response:

Renda v DHCR does not provide authority for the commentator's position. The regulations have always required a succession applicant to provide documentary evidence of primary residence and to have been listed on the annual income affidavit for the required period of time (or the notice of change in occupancy, when applicable). The regulations are drafted to protect those who would legitimately succeed as well as to prevent unqualified persons from circumventing the waiting list. Furthermore, the reduced co-residency requirement is intended to apply to a family member who is a senior citizen or disabled person in order to facilitate such persons' ability to find suitable housing of which they generally are in greater need. The proposed regulation has been revised to clarify that the filing of the Notice of Change in Family operates to provide proof of the date of occupancy until the date the annual income affidavit must be filed, but that the succession applicant must otherwise have been listed on the annual income affidavit and must also provide documentary evidence of his primary residence for the required period of time. In addition, the proposed regulation has been revised to clarify the co-residency period requirement and missing language was re-inserted.

Issue:

The requirement to provide budget projections for two years, in 1728-1.2(a), was criticized as "unrealistic." It was also suggested that rent determinations take too long.

Significant alternative(s):

DHCR should not require that a housing company's budget be established two years ahead of time, but instead should allow for changes as a result of economic volatility.

Agency Response:

In its proposal, DHCR reduced certain time periods and areas for DHCR review in order to make budget information more current while still providing residents sufficient time to prepare for increased carrying charges. As a result, no revision of the proposed regulation will be undertaken.

Issue:

The proposal should prohibit fuel oil futures contracts.

Significant alternative(s):

The commentator suggested that all heating fuel budgeting should be based on actual current expenses as outlined in proposed section 1728-1.3(d) which applies to electric, gas and steam charges.

Agency Response:

DHCR has found that locking in fuel oil prices has a stabilizing effect on budgets. As a result, no revision of the proposed regulation will be undertaken.

Issue:

Section 1728-4.1(b), regarding competitive bidding for purchases and contracts, is too open-ended; bidding should be mandatory for all purchases.

Significant alternative(s):

Section 1728-4.1(b) should require that "no less than three bidders must be solicited by the housing company[,]" rather than requiring competitive bidding "to the fullest extent possible." In addition, competitive bidding should also be required for fuel oil contracts.

Agency Response:

DHCR recognizes that there are circumstances under which such competitive bidding may not be feasible. As a result, no revision of the proposed regulation will be undertaken.

Issue:

Proposed Section 1728-4.2 ("Purchases and Contracts of Less than $100,000") should be revised.

Significant alternative(s):

Larger housing companies should be allowed higher thresholds with respect to purchases and construction supervision.

Agency Response:

DHCR's analysis demonstrates that the size of the company has less impact on the need for bidding than the kind of contract. As a result, no revision of the proposed regulation will be undertaken.

Issue:

Anti-warehousing provisions should be enhanced.

Significant alternative(s):

The Regulations should require that vacant apartments be offered and filled, based on the wait list, up to the date of dissolution.

Agency Response:

Offering apartments until the date of actual dissolution would be difficult to enforce and run contrary to the intent of a final dissolution vote. Nevertheless, proposed Section 1727-1.5 ("Warehousing") expressly creates a new, affirmative obligation for a housing company (including its principals and personnel) to fill all vacancies. As a result, no further revision of the proposed regulation will be undertaken.

Issue:

The requirements for dissolution under proposed Part 1750 ("Voluntary Dissolution") were said to lack clarity and proper protections, particularly with respect to the number of votes required, the plans that must be prepared and distributed, the use of proxies and the use of housing company funds.

Significant alternative(s):

Alternatives ran the gamut from prohibition of all proxies to special assessments for expenses associated with dissolution to spending caps to additional funding for competing dissolution studies.

Agency Response:

Generally, these proposals exceeded the scope of the amendments under consideration and would be more appropriate as the subject of a separate review of the dissolution regulations. As a result, no revisions will be undertaken with respect to these comments, except that the regulations were clarified at 1750.13(c)(1) to confirm that the current prohibition on proxies for the first dissolution vote remains in effect.

Issue:

The proposed dissolution regulations do not address the effect of these amendments on pending dissolution applications.

Significant alternative(s):

Pending dissolution applications should be allowed to proceed under the old regulations (i.e., "grandfathered").

Agency Response:

As the dissolution process requires a number of discrete steps, there is no good policy rationale for grandfathering those steps undertaken after the effective date of the proposed amendment. Therefore, 1750.19 was added to clarify that those steps taken under the present regulations remain effective, while any activities commencing after the effective date of the proposed regulations must conform to the amendments.

Issue:

The delivery of the Notice of Intent to each tenant in its entirety is problematic due to the volume of paper and certain privacy concerns.

Significant alternative(s):

Create a more streamlined notice which still must be served on each tenant.

Agency Response:

Section 1750.3(a) was modified so that the notice of intent (without supporting exhibits) would be served on each tenant as a minimal service requirement. The full notice of intent, including all exhibits (other than those which contain information protected by a right of privacy) must be available for inspection by the tenants on request at a location at or near the premises and tenants must be so notified.

¹ DHCR also held a public hearing in Syracuse, New York on May 29, 2009 but received no comments.