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

4/15/09 N.Y. St. Reg. HCR-15-09-00003-P

NEW YORK STATE REGISTER

VOLUME XXXI, ISSUE 15

April 15, 2009

RULE MAKING ACTIVITIES

DIVISION OF HOUSING AND COMMUNITY RENEWAL

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

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

The 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 proposed rule:

Proposed Action:

Amendment of Parts 1700, 1725, 1727, 1728, 1729, 1730, 1731, 1732, and 1750; repeal of Parts 1710, 1711, 1712, 1713, 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:

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

Substance of proposed rule (Full text is posted at the following State website:www.nysdhcr.gov):

The proposed amendments and new additions will alter the Mitchell-Lama Regulations in the following general manner:

I. PART 1700 - Scope and Definition

Part 1700 will be 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Parts 1710, 1711, 1712, and 1713 will be repealed in their entirety.

III. PART 1725 - General Administration

Part 1725 will be 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 will be 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 will be 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 will be 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 will be 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 will be 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 will be amended to:

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

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

Part 1740 will be repealed in its entirety.

XI. PART 1750 - Dissolution

Part 1750 will be 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.

XII. PART 1760 - Redevelopment and Refinance

Part 1760 will be 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.

Text of proposed 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]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. STATUTORY AUTHORITY

Articles II and IV of the Private Housing Finance Law ("PHFL") grant the Division of Housing and Community Renewal ("DHCR") broad powers to achieve the PHFL's express objectives. For example, PHFL §§ 27 and 82 provide that nearly all aspects of the establishment, financing and operations of private housing companies organized under Article II or IV ("housing companies") are subject to DHCR's consent and approval; PHFL § 32(5)(d) authorizes DHCR to investigate "the affairs of a [housing] company,….any person, firm, corporation or other entity having a financial interest, … [in] any project undertaken by a [housing] company..." and "the dealings, transactions or relationships of such company with third persons…".

PHFL §§ 32, 32-a, 84 and 84(a) provide DHCR with the discretionary authority to supervise activities and promulgate regulations under the PHFL. Specifically, PHFL §§ 32(3) and 84(9) authorize DHCR to "[f]rom time to time, make, amend and repeal … rules and regulations for carrying into effect the provisions of [respectively, Article II and Article IV] ….". PHFL § 84(2) permits DHCR to "order all housing companies to do such acts as may be necessary to comply with….the rules and regulations adopted by [DHCR]…".

PHFL §§ 32-a(1) and 32-a(6) authorize DHCR to promulgate regulations, specifically "…relating to managing agents, including criteria for the eligibility for selection and the compensation of managing agents …." and "…providing for recognition of duly constituted tenants' associations and cooperators' advisory councils….".

Finally, PHFL §§ 31(7) and (7-a) allow DHCR to provide preferential access for housing accommodations to, respectively, qualified veterans of the Vietnam War and to all disabled veterans.

2. LEGISLATIVE OBJECTIVES

As expressly stated in PHFL § 11, the Private Housing Finance Law was enacted to ensure that there is an adequate supply of safe and sanitary dwelling accommodations for persons of low- and moderate-income, upon a legislative determination that private enterprise, by means of granting state financing and tax exemptions to housing companies regulated by law as to profits and rents, should be encouraged to invest in such companies. Significantly, such housing companies receive publicly-sponsored mortgage loans and/or local property tax abatements in exchange for government supervision. The terms and conditions regarding such subsidized financing are detailed in PHFL §§ 20, 22, 26 and 26-a.

Owners of rental housing companies are limited to a six percent annual return on their initial investment, as provided in PHFL § 28. Likewise, under PHFL § 31-a, the resale price of owner-occupied cooperative apartment is limited to the original purchase price (set with DHCR approval), a pro-rated share of the mortgage amortization and capital assessments paid, if any.

Moreover, pursuant to PHFL § 31, admission to all housing companies is limited by various formulas which compare family income with either rent or the area median income. Additionally, tenants in occupancy whose income subsequently exceeds the relevant formula must pay an additional rental or maintenance surcharge.

Also, PHFL § 32(7) authorizes DHCR, in addition to seeking such other remedies as may be available, to commence an action or proceeding in court, to enforce DHCR orders and to prevent violations of law or any other action which may be "improvident or prejudicial to the interests of the public, or the lien holders, stockholders or tenants…" of a housing company.

Accordingly, while consistent with DHCR's statutorily granted rule-making authority and the purpose and objectives of Articles II and IV of the PHFL, the proposed rules;

a. update and streamline DHCR's regulations to make compliance less cumbersome and more feasible for both owners and residents, and

b. more effectively direct DHCR's resources to areas where its enforcement is necessary.

3. NEEDS AND BENEFITS

The regulations govern the management and supervision of Mitchell-Lama developments. DHCR conducts site visits, examines housing company books and records, and has oversight authority with respect to almost all housing company transactions. This oversight includes selection and monitoring of housing company management, contracts with vendors, bi-annual budgets, rent increases, tenant selection and commercial leasing. With respect to tenant selection, DHCR regulations require comprehensive waiting list procedures to assure a fair allocation of apartments.

There are significant issues facing the Mitchell-Lama housing portfolio. Twenty years after initial occupancy, a housing company has the right to "dissolve" and reconstitute as a private, for-profit entity, resulting in the end of DHCR supervision and the moderate-income restrictions of the PHFL. Market forces increasingly act as an incentive to seek higher profit margins, which in turn, encourages owners to exercise their right to dissolve and remove the property from the affordable housing rolls. Overly burdensome regulatory requirements can tip the scale in favor of dissolution.

For those housing companies that remain in the portfolio, a significant infusion of capital is often necessary to upgrade aging building systems. However, even for those housing companies that can obtain such capital, the regulations are often an impediment to a major redevelopment plan. A typical plan requires the project to participate in multiple funding programs that must be administered in tandem by multiple agencies. Each of these programs has its own regulatory requirements which may duplicate or conflict with the extensive and detailed requirements of the Mitchell-Lama program.

While at its inception the Mitchell-Lama portfolio was relatively homogenous and could be supervised in a uniform manner, over the years the developments have moved in different directions. Some projects are now efficiently run and need minimal supervision, while others require closer monitoring. For example, at some cooperative developments, shareholders have sought additional profit through "under the table" transfers to new residents, irrespective of the Mitchell-Lama income limitations and waiting list procedures. In other developments, cooperative and rental alike, there have been instances of self dealing by managing agents with respect to housing company contracts for services and capital work, which, while otherwise necessary for a project's efficient operation, requires significant monitoring to assure fair prices and the appropriate selection of vendors and contractors.

The regulations were first promulgated in 1965 and since then have not been subject to comprehensive review. Entitled "Management Manual," they are filled with detail on the minutiae of property management, unrelated and irrelevant to actual regulatory requirements of the Mitchell-Lama program. DHCR has now undertaken such a review and determined that the regulations need to be revised and updated to accomplish the following:

• implement contemporary management and supervisory models, reflect DHCR's actual best practices, and conform to current statutory amendments and judicial decisions.

• remove provisions that impose unnecessary burdens on owners, thereby encouraging them to exercise their right to dissolve and leave the Mitchell-Lama program.

• reflect a firmer basis for focusing supervisory resources on developments and items where DHCR, based on its experience, has determined that supervision is most needed.

• avoid unnecessary and duplicative supervisory practices in order to accommodate modern preservation and redevelopment plans which involve multiple subsidy programs administered in tandem, thereby encouraging owners to undertake plans to preserve the stock of affordable housing.

Based on these findings, DHCR developed the proposed amendments in order to:

• eliminate unnecessary regulation,

• streamline procedures,

• reflect contemporary and best agency practices,

• reflect recent legislation and judicial decisions,

• strengthen DHCR's enforcement capability,

• lessen the regulatory burden on housing companies while focusing DHCR supervision on problem areas, and

• encourage preservation of the portfolio as affordable housing.

The amendments encourage preservation by, among other things, providing for expedited review of government loans and other sources of refinancing, eliminating competitive bidding for certain management contracts, and implementing the provisions of a recent statutory amendment intended to avoid duplication of DHCR's supervisory practices where a development is subject to regulation under other government programs. The amendments also reduce DHCR's direct involvement in management supervision, and consequently the owner's regulatory burden, by permitting automatic renewals of management contracts based on performance, raising the monetary threshold for prior DHCR approval of contracts, reducing requirements for DHCR approval of progress payments, largely dispensing with prior DHCR approval of commercial contracts, foregoing budget review in requests for moderate rent increases, and codifying DHCR's practice of waiving prior approval of move-ins for developments with short waiting lists.

In addition, the new regulations permit housing companies, upon proper notice of termination and, if applicable, opportunity to cure, to go directly to court to seek eviction of residents not entitled to occupancy and to accept rent when a "succession" appeal is pending before the Division without waiving its objection to the tenant's possession. Furthermore, the standards for determining appropriate household size are also revised by removing references to gender, age, and marital status.

Streamlining DHCR's supervisory practices will free up valuable agency resources to focus on those developments that need more attention. The amendments facilitate DHCR's efficient use of those resources by expressly authorizing the agency to adjust the degree of supervision of a development based on its circumstances, and by codifying the supervisory tools which the agency may employ, such as denying or reducing compensation, suspending or terminating the management contract, taking direct control of management responsibilities, and advising a municipality to revoke its real estate tax abatement. The amendments also clarify and refine the existing rules governing identity of interest, and provide for additional notice, disclosure, and other safeguards upon dissolution.

4. COSTS

The amended regulations do not impose any new program, service, duty, or responsibility upon any state agency or instrumentality thereof, local government or (with the exception of the regulated entities) business, and therefore impose no costs on those entities. For the regulated entities, implementation costs should be relatively minimal, especially when compared with the value of these properties. In fact, such costs are already a generally-accepted expense of owning and/or operating government-supervised, subsidized housing. Indeed, the streamlined policies and procedures implemented by the amendments should result in overall cost savings to the regulated parties and the agency. Significantly, tenants will not incur any costs through implementation of the proposed regulations.

5. LOCAL GOVERNMENT MANDATES

The proposed rule making will not impose any new program, service, duty or responsibility upon any level of local government.

6. PAPERWORK

The amendments will not increase the paperwork burden on either the regulated parties or the agency. In fact, they should decrease paperwork, due to the streamlined policies and procedures implemented by the amendments.

7. DUPLICATION

The amendments do not add any provisions that duplicate any known State or federal requirements except to the extent required by law where a development participates in other State or federal programs. One of the major purposes of the amendments is to institute supervisory practices which avoid such duplication since modern redevelopment transactions often combine multiple subsidy programs that must be administered in tandem.

8. ALTERNATIVES

The alternative to the proposed amendments was to forgo this review. However, this was considered inappropriate in view of the pressing need to streamline and modernize DHCR's supervisory practices by making them less duplicative and burdensome and more consistent with contemporary management models, DHCR's actual best practices and recent statutory amendments and judicial decisions.

9. FEDERAL STANDARDS

The proposed amendments do not exceed any known minimum federal standards.

10. COMPLIANCE SCHEDULE

It is not anticipated that regulated parties will require any significant additional time to comply with the proposed rules. DHCR has already engaged in extensive discussions with the regulated parties regarding the proposed amendments, and the amendments are in part the product of recommendations made by those parties. DHCR will continue to keep the regulated parties apprised of the contents of the amendments as finally adopted, and the manner in which they will be introduced and administered.

Regulatory Flexibility Analysis

1. EFFECT OF RULE

To the extent that each housing company subject to Division of Housing and Community Renewal (DHCR) supervision is considered a small business, the amended regulations are expected to have no burdensome impact on such small businesses. On the contrary, one of the main purposes of the amendments is to streamline and update the management and supervisory practices reflected in the regulations, so that the net effect will be to reduce the overall regulatory burden upon all owners. The amendments would be likely to have the same effect, if any, on local governments.

2. COMPLIANCE REQUIREMENTS

The proposed amendments would not require the regulated parties or local governments to perform any additional recordkeeping, reporting, or other acts. The overwhelming effect of the amendments will be to significantly reduce the owners' obligations under DHCR's oversight. The amendments will moderate DHCR's direct involvement in management supervision by such measures as permitting automatic renewals of management contracts based on performance, raising the monetary threshold for prior DHCR approval of contracts, reducing requirements for prior DHCR approval of progress payments, largely dispensing with prior DHCR approval of commercial contracts, foregoing budget review in requests for moderate rent increases, and codifying DHCR's practice of waiving prior approval of move-ins for developments with short waiting lists.

The streamlining of DHCR's supervisory practices will free up valuable agency resources to focus on those developments that need more attention. The amendments facilitate DHCR's efficient use of those resources by expressly authorizing the agency to adjust the degree of supervision of management based on the circumstances, and codifying the supervisory tools which the agency may employ, such as denying or reducing compensation, suspending or terminating a management contract, taking direct control of management responsibilities, and advising a municipality to revoke its real estate tax abatement. The amendments also clarify and refine the existing rules governing identity of interest, and provide for additional notice, disclosure, and other safeguards upon dissolution.

When the extent of supervision is tailored to the needs of a particular project, it is likely that some owners will experience increased regulatory attention. However, while the amendments will certainly facilitate this result, they do not require it. Rather, the proposed regulations articulate the various measures which DHCR may employ with respect to a particular development, as the circumstances warrant. Moreover, the codified supervisory measures are all within DHCR's general supervisory authority and could be applied by DHCR as a matter of discretion, even in the absence of the amendments.

3. PROFESSIONAL SERVICES

The proposed amendments do not require small businesses to obtain any new or additional professional services. Since inception, each Housing Company has retained counsel, agents, contractors and other professionals to implement the statutory and regulatory requirements of the Private Housing Finance Law.

4. COMPLIANCE COSTS

There is no indication that this action will impose any significant, initial costs upon small businesses or local governments. It is expected that the annual cost of compliance with the new rules will be no different than the cost of compliance with existing rules.

5. ECONOMIC AND TECHNOLOGICAL FEASIBILITY

Compliance is not anticipated to require any unusual, new or burdensome technological applications.

6. MINIMIZING ADVERSE IMPACT

These proposed amendments do not impair the rights of small business owners, and they have no adverse economic impact on such parties or any local government. Consequently, it was not necessary to consider the approaches suggested in SAPA section 202-b(1).

7. SMALL BUSINESS AND LOCAL GOVERNMENT PARTICIPATION

DHCR sought and received input from a statewide task force of attorneys representing owners and tenants, as well as from others representing housing providers. DHCR officials also described the proposed amendments and solicited feedback during various professional conferences convened prior to the commencement of the SAPA process.

Recently, DHCR circulated a "management bureau memorandum" explaining the proposed regulations to, and soliciting comment from, all Mitchell-Lama housing companies. In addition, drafts of the regulations have been placed on the Division's web site.

Rural Area Flexibility Analysis

1. TYPES AND ESTIMATED NUMBERS OF RURAL AREAS:

Approximately 20 housing developments for families or senior citizens are located in rural counties in New York State. All are federally-assisted developments. It is not anticipated that the new regulations will impose any significant, additional reporting, recordkeeping, or other compliance requirements on public or private entities located in any rural area pursuant to Subdivision 10 of SAPA Section 102. On the contrary, one of the main purposes of the amendments is to streamline and update the management and supervisory practices reflected in the regulations, so that the net effect will be to reduce the overall regulatory burden upon owners.

2. REPORTING, RECORDKEEPING AND OTHER COMPLIANCE REQUIREMENTS:

It is not anticipated that any additional professional services will be needed for housing companies located in rural counties to comply with these regulations as each housing company already has professionals who are retained to assure compliance with DHCR regulations.

3. COSTS:

It is not anticipated that these regulations will cause a significant variation in costs for the housing companies located in rural counties.

4. MINIMIZING ADVERSE IMPACT:

No adverse impact upon the housing companies is anticipated.

5. RURAL AREA PARTICIPATION:

DHCR sought and received input from a statewide task force of attorneys representing owners and tenants, as well as from others representing housing providers. DHCR officials also described the proposed amendments and solicited feedback during various professional conferences convened prior to the commencement of the SAPA process.

Recently, DHCR has circulated a "management bureau memorandum" explaining the proposed regulations to, and soliciting comment from, all Mitchell-Lama housing companies, including those located in rural areas. In addition, drafts of the regulations have been placed on the Division's web site.

Job Impact Statement

The amended regulations are intended to streamline and update the regulations governing agency oversight of housing companies to reflect contemporary best management and supervisory practices and current statutory and case law. It is apparent from the text of the rules that the regulations will have no adverse impact on jobs or employment opportunities.