Entities which own and control housing companies under the Private Housing Finance Law.
Purpose:
To regulate the approval of a partner, the transfer of interest in a housing company, and the conduct of the partner.
Text of final rule:
The Management Manual for Housing Companies, as amended and adopted pursuant to the powers granted to the Division of Housing and Community Renewal by the Private Housing Finance law, Section 32 (as derived from section 319 of the Public Housing Law, as amended; repealed by chapter 803, Laws of 1961) as amended and Section 84 (as derived from section 181 of the Public Housing Law, as amended; repealed by chapter 803, Laws of 1961) as amended, is further amended to add a new part 1733 as provided below:
PART 1733
PARTNERSHIP RELATIONS AND TRANSFERS OF INTERESTS IN RENTAL HOUSING COMPANIES.
Section 1733: Rights and Duties of Partnerships and Housing Companies.
(a) Partnership Agreements. Partnership agreements and amendments thereto must be in compliance with the Private Housing Finance Law and regulations, and are subject to the prior, written approval of the commissioner.
(b) Financial Records and Partnership Distributions. A partnership shall furnish to the commissioner such financial and other reports as the commissioner deems necessary. All distributions by a partnership are subject to the prior, written approval of the commissioner.
(c) Partnership/Housing Company Transactions. A housing company which is in a partnership, or a partnership acting on behalf of a housing company, may not enter into contracts with persons or entities in which the general partner or any person or entity who is actively involved in the ownership or management of the property has a direct or indirect interest, or which are controlled by such general partner or other person or entity, without the prior, written approval of the commissioner.
(d) Transfers of Interests in Partnerships. Transfers of general partner or controlling interests in the partnership, including but not limited to the substitution or admission of a new general partner, are subject to the prior, written approval of the commissioner.
(e) Transfers of Interests in Housing Companies. An interest in a housing company may not be sold or otherwise transferred without the prior, written approval of the commissioner.
(f) Standard of Review. In reviewing requests for approval of changes in ownership interests under this section, in addition to determining compliance with all other requirements for such sales or transfers, the commissioner shall determine that the proposed purchaser or transferee is a qualified and responsible owner, which shall mean that the proposed purchaser or transferee has the capacity to maintain such property in good physical and financial condition, and in compliance with program requirements. In making such determination, the commissioner may consider the purchaser or transferee's past performance with regard to the following factors:
(1) successful experience in owning or managing comparable residential properties;
(2) mortgage defaults;
(3) suspensions, debarments, terminations or substandard performance under a government program;
(4) loss of any licenses or permits;
(5) criminal convictions;
(6) civil injunctions or other court sanctions, including any judgments;
(7) defaults on loans or surety or performance bonds;
(8) building maintenance and code violations on other buildings;
(9) bankruptcies; and
(10) other factors which bear on the capacity of the purchaser or transferee to maintain the project in good physical and financial condition and otherwise comply with program requirements.
(g) Conditions on Approval. In the event that the dissolution or reconstitution of a housing company is limited or precluded by statute, local law, ordinance, land disposition agreement, deed restriction, or by any other terms of creation, conveyance or through its organizational documents, the Commissioner may condition approval of a request to sell or transfer a housing development owned by such housing company, or any other interest set forth in this Part, upon the continuation of such limitation or preclusion against the buyer or transferee.
(h) Failure to Provide Information or Documentation. Failure to provide information or documentation which the commissioner deems necessary to determine a request for approval under this section may be the basis for rejecting any application filed hereunder.
Final rule as compared with last published rule:
Nonsubstantive changes were made in section 1733(c).
Text of rule and any required statements and analyses may be obtained from:
Gary R. Connor, Esq., Division of Housing and Community Renewal, 25 Beaver St., 7th Fl., New York, NY 10004, (212) 480-6707, e-mail: gconnor@nysdhcr.gov
Regulatory Impact Statement
DHCR has promulgated 9 NYCRR 1733 because although administration of the Private Housing Finance Law required DHCR to approve transfers of ownership interests in these companies, there were no regulations governing the approval process. These regulations codify DHCR's role and standards in the process of approving the transfer of the housing company or partnership so as to allow DHCR to assure that responsible individuals and entities will be in control of the housing company and that obligations placed on housing companies are not circumvented or impinged upon by the use of such partnerships.
To accomplish this end, section 1733(c) required that a housing company which is in a partnership, or a partnership acting on behalf of a housing company receive the prior written approval of the Commissioner before entering into contracts with persons or entities in which other partners have a direct or indirect interest, or which are controlled by other partners. As a result of public comment, DHCR revised section 1733(c) to exclude limited partners who do not actively participate in the operation or management of the property from the requirement that such contracts receive the prior approval of the Commissioner.
Although the text of the regulation has been modified in this regard, such modification is not a substantial revision and does not necessitate a change in any of the statements made in the originally-published Regulatory Impact Statement.
Regulatory Flexibility Analysis
DHCR has promulgated 9 NYCRR 1733 because although administration of the Private Housing Finance Law required DHCR to approve transfers of ownership interests in these companies, there were no regulations governing the approval process. These regulations codify DHCR's role and standards in the process of approving the transfer of the housing company or partnership so as to allow DHCR to assure that responsible individuals and entities will be in control of the housing company and that obligations placed on housing companies are not circumvented or impinged upon by the use of such partnerships.
To accomplish this end, section 1733(c) required that a housing company which is in a partnership, or a partnership acting on behalf of a housing company receive the prior written approval of the Commissioner before entering into contracts with persons or entities in which other partners have a direct or indirect interest, or which are controlled by other partners. As a result of public comment, DHCR revised section 1733(c) to exclude limited partners who do not actively participate in the operation or management of the property from the requirement that such contracts receive the prior approval of the Commissioner.
Although the text of the regulation has been modified in this regard, such modification is not a substantial revision and does not necessitate a change in any of the statements made in the originally-published Regulatory Flexibility Analysis.
Rural Area Flexibility Analysis
DHCR has promulgated 9 NYCRR 1733 because although administration of the Private Housing Finance Law required DHCR to approve transfers of ownership interests in these companies, there were no regulations governing the approval process. These regulations codify DHCR's role and standards in the process of approving the transfer of the housing company or partnership so as to allow DHCR to assure that responsible individuals and entities will be in control of the housing company and that obligations placed on housing companies are not circumvented or impinged upon by the use of such partnerships.
To accomplish this end, section 1733(c) required that a housing company which is in a partnership, or a partnership acting on behalf of a housing company receive the prior written approval of the Commissioner before entering into contracts with persons or entities in which other partners have a direct or indirect interest, or which are controlled by other partners. As a result of public comment, DHCR revised section 1733(c) to exclude limited partners who do not actively participate in the operation or management of the property from the requirement that such contracts receive the prior approval of the Commissioner.
Although the text of the regulation has been modified in this regard, such modification is not a substantial revision and does not necessitate a change in any of the statements made in the originally-published Rural Area Flexibility Analysis.
Job Impact Statement
DHCR has promulgated 9 NYCRR 1733 because although administration of the Private Housing Finance Law required DHCR to approve transfers of ownership interests in these companies, there were no regulations governing the approval process. These regulations codify DHCR's role and standards in the process of approving the transfer of the housing company or partnership so as to allow DHCR to assure that responsible individuals and entities will be in control of the housing company and that obligations placed on housing companies are not circumvented or impinged upon by the use of such partnerships.
To accomplish this end, section 1733(c) required that a housing company which is in a partnership, or a partnership acting on behalf of a housing company receive the prior written approval of the Commissioner before entering into contracts with persons or entities in which other partners have a direct or indirect interest, or which are controlled by other partners. As a result of public comment, DHCR revised section 1733(c) to exclude limited partners who do not actively participate in the operation or management of the property from the requirement that such contracts receive the prior approval of the Commissioner.
Although the text of the regulation has been modified in this regard, such modification is not a substantial revision and does not necessitate a change in the originally-published Job Impact Statement Exemption.
Assessment of Public Comment
This assessment specifies the major substantive issues raised in the two letters received concerning the new regulations governing Partnership Relations and Transfers of Interests in Rental Housing Companies. The assessment includes the alternatives suggested and DHCR's COMMENTARY in response thereto.
The Regulations were published in the New York State Register on February 20, 2008, and the period for the submission of public comments on these amendments ended on April 5, 2008.
Comment: Under Section 1733 (d) transfers of interests from limited partners to general partners or controlling interests or to new partners should also require approval by the Commissioner.
Response: The proposed regulations do require prior approval of a transfer of a controlling interest to a new partner. However they do not require prior approval of a transfer of a limited partner's interest to an existing general partner because the interest of the limited is generally that of a passive investor, and the general partner is already in control of the operation and management of the property, so the transfer is not likely to affect management or operations. Accordingly, after considering the alternative, DHCR has determined that to require prior approval of such transfers in every instance would be unnecessary and could create an undue regulatory burden, especially where, as is often the case in modern real estate ownership structures, there are a large number of limited partners.
Comment: All written and financial documentation in connection with the proposed change should be submitted to the Commissioner.
Response: In considering this comment, DHCR concluded that since modern real estate transactions are often multifaceted, and may involve voluminous documents, only some of which are relevant to DHCR's supervisory responsibilities, DHCR believes it is only necessary to require the submission of documentation which is relevant or necessary to satisfy DHCR's inquiries. However, there is nothing in these regulations which preclude DHCR from making all inquires and requesting all documentation which DHCR deems necessary to fulfill its statutory functions in the particular circumstances presented.
Comment: Section 1733(f) should explicitly state that DHCR must determine that the proposed sale price is compatible under the existing rent structure. Sales that are not supportable under Mitchell-Lama should be rejected.
Response: This comment is a request for an additional provision rather than a comment on an existing provision of the proposed regulations. Accordingly, it would be inappropriate for DHCR to respond to this comment in the context of these proceedings or to modify these proposed regulations in response to the comment.
Comment: Under Section 1733(g), under what circumstances would conditions affecting dissolution NOT survive purchase? DHCR should reject any application for dissolution given these restrictions.
Response: The circumstances and conditions that might affect a dissolution or reconstitution are many and varied, as are their possible effects upon a housing company's ability to dissolve or reconstitute. In considering this comment, DHCR has determined that it would not be appropriate to provide an exclusive list of such circumstances in a regulation, nor would it be appropriate for a regulation to dictate the final outcome of this type of review. DHCR, however, will review these matters on a case-by-case basis as appropriate.
Comment: Sections 1733(g) and (h) should affirmatively read that DHCR “shall” act (as opposed to “may” act) to reject sales that do not meet the regulation's requirements.
Response: In reviewing requests for approval of a transfer of interests, DHCR believes that it should maintain discretion as to questions of whether the requirements of the regulations have been met.
Comment: Article II of the Private Housing Finance Law (“PHFL”) does not give the Commissioner the power to implement these proposed regulations.
Response: After considering this comment, DHCR believes that its Regulatory Impact Statement adequately sets forth those provisions of the PHFL which give the Commissioner the power to implement these regulations.
Comment: The Regulation's standards are vague and overly broad and impose duties upon and authorize DHCR to assume responsibility beyond what its staff may accomplish in a timely and business-like manner.
Response: Under various statutes, regulations, and regulatory agreements, or simply as matter of discretion, various state agencies, including DHCR, have been reviewing changes in title, beneficial interests, controlling interests, and management, as well as the creation of new housing companies without causing undue delay or hardship to the regulated parties. DHCR believes it has the staff capacity to act within a reasonable time-frame and to work with all affected parties to do so.
Comment: Under Section 1733(a), the scope of review should be limited to compliance with the PHFL. The Commissioner should not have the ability to review and approve any partnership provisions which are not regulated by the PHFL.
Response: In considering this comment, DHCR believes it has a duty to inquire into those areas which affect the purposes of the PHFL. While in most instances these are areas which are expressly addressed in the PHFL, there are instances where a matter has a significant impact on the purposes of the PHFL though not specifically referenced in the statute.
Comment: The areas of review should be specifically enumerated so all parties know what is expected. DHCR's staff lacks the expertise to evaluate and should not be expected to review and approve complicated partnership agreements.
Response: DHCR reviewed its regulations with this comment in mind, but finds that the regulations are sufficiently explicit. DHCR will limit its review to what is necessary under the circumstances, and can evaluate what is appropriate to fulfill its supervisory responsibilities.
Comment: Under Section 1733(b), distributions to partners should not be subject to the Commissioner's prior approval because the Commissioner's staff does not have the capacity to do this review in a timely manner. The Commissioner has the power to audit the financial statements of the partnership and may act on unauthorized distributions afterwards.
Response: In considering this comment, DHCR believes that historically it has routinely conducted prior review of these distributions without causing undue delay or burden upon the regulated parties.
Comment: The provision of section 1733(c) which prohibits contracts with persons or entities in which other partners have a “direct or indirect interest” “controlled by the partners” without the Commissioner's prior approval is vague and “indirect interest” is not explained.
Response: This language has been part of the Regulations with respect to DHCR's identity of interest provisions since their enactment in 1992. (See, 9NYCRR.1725-2.5 and 1729-1.4) and appears in PHFL Section 32(5)(d) which delineates DHCR's investigative authority. Given its historical usage, DHCR foresees no difficulty in interpreting this section.
Comment: Under Section 1733(c), contracts involving interests held by limited partners should not be included among the contracts requiring prior approval of the Commissioner. Partnerships have many partners, including limited partners, for instance, who may have interests in other companies which may have contracts with the housing company of which the partners are not even aware. These partners have no role with respect to the operation of the partnership. Many of the investors in low-income housing tax credit projects which are investors in projects preserving Mitchell Lama housing are financial institutions or affiliated with very large financial institutions which may have other contracts with the partnerships and general partners apart from the investment. Any approval should be limited to affiliates of the general partner and limited to material contracts involving material sums.
Response: This comment is found to have merit. Accordingly, Section 1733(c) is revised to exclude limited partners who do not actively participate in the operation or management of the property from the requirement that such contracts receive the prior approval of the Commissioner. However, the exclusion of contracts involving limited partners who do not actively participate in the operation or management of the property from the requirement that such contracts be first approved by the Commissioner does not preclude DHCR from reviewing such business relationships as is necessary to fulfill its supervisory function. PHFL Section 32(5)(d) provides that DHCR may “investigate into the affairs of a company and into the dealings, transactions or relationships of such company with third persons and into the affairs of any person, firm, corporation or other entity having a financial interest, whether direct or indirect, in the design, construction, acquisition, reconstruction, rehabilitation, improvement, financing or operation of any project undertaken by a company.” This change brings the standard of review more in line with the standard of review contained in Section 1733(d) wherein transfers involving limited partners are generally not subject to prior approval of the Commissioner.
Comment: While most of the factors for review listed in 1733(f) are reasonable, factor 10, which allows the Commissioner to consider “other factors which bear on the capacity of the purchaser or transferee to maintain the project in good physical and financial condition and otherwise comply with program requirements” is vague and does not set forth standards as to what will be considered.
Response: The list represents an attempt to anticipate the most common relevant factors. However, others may present themselves in the course of DHCR's case-by-case review. Accordingly, a certain level of discretion is required to meet circumstances as they arise, and any such review pursuant to Section 1733(f)(10) will be on notice and with an opportunity to be heard.
Comment: Section 1733(g) is vague and appears to authorize the Commissioner to act in areas beyond her authority or expertise. The Commissioner does not have the authority to interpret or enforce statutes or local law except as provided in the PHFL.
Response: Both DHCR and the New York City Department of Housing Preservation and Development (“HPD”) have interpreted provisions of other documents and local law which may preclude dissolution. The agencies' determinations are subject to judicial review, and there has been significant litigation over such issues. DHCR's staff is accustomed to conducting this type of review, as are many law firms and title insurance companies as a matter of course as part of a due diligence review.
Comment: If these or similar regulations are enacted, they should only be effective with respect to contracts to transfer partnership or housing company interests entered into after the effective date of the regulations. Individuals, housing companies and partnerships have entered into contracts in good faith with respect to existing law and expended substantial sums under these contracts. Entities which have entered contracts after being advised that DHCR did not have rules or regulations requiring such approval would be adversely affected by having to comply with these regulations.
Response: The proposed regulations are largely intended to be a codification of current practice and therefore will not subject a party to more stringent review than existed prior to their effective date. However, these regulations are remedial in nature, and are being promulgated based on concerns raised in transactions coming before the agency. DHCR reached out to affected parties advising them that these regulations were being contemplated. As to prior transactions completed by parties who were unaware of the need for review, the regulations do not provide for automatic nullification of prior transfers, and in cases of possible undue hardship or prejudice DHCR will entertain requests for waivers on a case-by-case basis. Note that while an applicant before an agency does not have the right to keep the applicable rules unchanged, under 9 NYCRR Section 1725-2.8, where a proceeding is pending prior to the adoption of a rule, DHCR has discretion to continue processing under the rules in effect when the proceeding was commenced. DHCR believes it can exercise its discretion appropriately.
Comment: The costs will not be minimal. The Commissioner will need to hire and train additional staff to implement these rules, and compliance with the disclosure and approval processes at the federal and municipal level will involve substantial costs to the housing company.
Response: In balancing the need for regulation against the possibility of undue regulatory burden, DHCR selected this alternative over the more burdensome one of review of every partnership interest, including limited partners, as suggested by one commentator.
