Appendix — Price v. Pierce

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Ne ee a a ee ee eo es er ce or

87-967

No.

IN THE a Sonate. Seven, IR,

SUPREME COURT OF THE UNITED STATES .

October Term 1987

AUDREY PRICE, NAILA KURDI, SHARON ATRA,

EUGENE STERN, and PATRICIA MARQUARDT,

individually and on behalf of all others similarly situated,

and HOPE FAIR HOUSING CENTER

Petitioners

VS.

SAMUEL PIERCE, in his official capacity as Secretary

of the United States Department of Housing and Urban

Development; A. D. VAN METER, in his official

capacity as Chairman of the Illinois Housing

Development Authority; JAMES KILEY, in his

official capacity as Executive Director of the Illinois

Housing Development Authority; HAWTHORN

RIDGE ASSOCIATES, an Illinois limited partnership;

VERNON HILLS ASSOCIATES IL, an Illinois limited

partnership; TRAILS VENTURE, an Illinois limited

partnership; GRANWOOD GARDENS ASSOC., an

Illinois limited partnership; PRAIRIEBROOK

VENTURE, an Illinois limited partnership;

ARROWHEAD APARTMENT ASSOCIATES, an

Illinois limited partnership,

Respondents

APPENDIX SUPPORTING

PETITION FOR WRIT OF CERTIORARI

BERNARD H. SHAPIRO

Prairie State Legal Services

208 West State Street -Suite 802

Rockford, IL 61101

815 965-2134

GERALD BRASK

Prairie State Legal Services

Counsel for Petitioners

EDITOR'S NOTE

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du the

United States Court of Appeals

Bor the Seventh Cirrntt

No. 86-1906

AUDREY PRICE, et al.,

-Plainttffs-Appellants,

SAMUEL PIERCE, et al.,

Defendants-A ppellees.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 83 C 6291—William T. Hart, Judge.

ARGUED FEBRUARY 13, 1987—DeEcIDED JULY 8, 1987

Before Woop JR., POSNER, and MANION, Circuit

Judges.

POSNER, Circuit Judge. In 1974 Congress passed a stat-

ute “For the purpose of aiding lower-income families in

obtaining a decent place to live and of promoting eco-

nomically mixed housing.” 42 U.S.C. § 1437fla). (A “lower-

income family”’ is one whose income is no more than 80 per-

cent of the median family income in the area. 42 U.S.C.

§ 1437f(fK1) (1976), now § 1437a(bX2).) The statute autho-

rized the Department of Housing and Urban Develop-

ment to subsidize both existing housing (§ 1437f(bX1)) and

newly constructed or substantially rehabilitated housing

(§ 1437f(bX2), repealed in 1983). The second provision is

the one in issue here, in particular the language authoriz-

ing HUD to “make assistance payments pursuant to con-

tracts with owners or prospective owners who agree to

2 No. 86-1906

construct . . . housing in which some or all of the units

shall be available for occupancy by lower-income families

To implement this part of the new program (the “eco- r

nomically mixed housing’”’ or ‘Section 8” program as it a

is often called), Congress appropriated money to HUD to

pass along to state housing agencies, such as the Illinois z

Housing Development Authority (IHDA), which in turn |

would give it to developers. The developers -would bill -

IHDA a specified amount for each apartment rented to

a lower-income family and IHDA would be reimbursed 5

by HUD.

Between 1975 and 1978 IHDA made and HUD approved

contracts with seven developers, who agreed to lease 40

percent (a total of 482) of the apartments in certain apart-

ment complexes in the Chicago suburbs to lower-income

families, in exchange for rent subsidies under section -

1437(bX2); the developers also received mortgage subsidies

from IHDA. But then IHDA let developers reduce the Pe

percentage of apartments rented to lower-income families

to 20 percent. The developers got no rent subsidies from

IHDA (financed by HUD) on any of the apartments not ~

rented to lower-income families but they still had the 3

benefit of the mortgage subsidies from IHDA, for these .

subsidies were not tied to the percentage of units rented,

or committed to be rented, to such families. Moreover,

the more developments over which HUD’s subsidies are -

spread (because the lower the percentage of lower-income |

housing in each development), the higher are HUD’s costs

of administering the Section 8 program, though not its

subsidy costs.

In 1981 Congress amended the statute to require devel-

opers to fulfill their contractual commitments to rent to j

lower-income families; until then, as we shall see, federal

law did not condition entitlement to Section 8 subsidy on ;

the developer’s adhering to its commitment. The amend- 4

ment does not affect contracts made before 1981. See Act -

of Aug. 13, 1981, Pub. L. 97-35, 8§ 325(1), 371(b), 95 Stat.

357, 406, 431. Nor does the repeal of section 1437f(bX2) ag q

i i

No. 86-1906 3

in 1983 affect this case. See Act of Nov. 30, 1983, Pub. L.

98-181, § 20%aX2), 97 Stat. 1153, 1183.

This suit was brought in 1983 by five persons who ear-

lier that year had made inquiries about the availability

of subsidized apartments at three of the six developments,

and by an organization that assists lower-income families

to find housing. The defendants are the developers, plus

the heads of HUD and IHDA. The individual plaintiffs had

been told there were no vacancies and had been placed

on waiting lists. Only two of them bothered to fill out

an application to rent, both at the same development. The

suit claims that the individual plaintiffs are third-party

beneficiaries of the cuntracts between IHDA and the de-

velopers, that the developers broke the contracts and

HUD refused to enforce them, that IHDA violated sec-

tion 1437(bX2), and that IHDA and HUD deprived the

individual plaintiffs of property without due process of

law. The district court rejected these claims and (so far

as pertinent to this appeal) entered judgment for the

defendants, after holding that the plaintiffs had standing

to bring this suit and after certifying it as a class action

on behalf of all similarly situated persons. 615 F. Supp.

173 (N.D. Ill. 1985).

The first issue is whether the plaintiffs have standing

to sue. The standing of the organization, and of the three

individual plaintiffs who never bothered to fill out formal

applications, is doubtful but need not be resolved; it is

enough, to give us jurisdiction over the case, if one of

the plaintiffs has standing. Secretary of the Interior v.

California, 464 U.S. 312, 319 n. 3 (1984). The two who

filled out applications do. True, if only they are proper

plaintiffs, then among the developer defendants only the

one to whom those two plaintiffs applied has an actual

controversy with a party, and the other developers should

be dismissed from the suit. But as we shall be dismiss-

ing the suit anyway, it seems unnecessary and ill-advised

to get involved in difficult questions of standing that

would neither change the outcome nor enable us to avoid

a discussion of the merits. A further point is that this

4 No. 86-1906

suit was certified as a class action, and perhaps the best

* way to view the named plaintiffs is as candidates for class

representative. If at least one plaintiff had standing when

the suit was brought and certified as a class action, and

if continuously after that there was a live controversy be-

tween at least one defendant and one member of the class

(not necessarily a named plaintiff), there is federal jurisdic-

tion. Sosna v. Iowa, 419 U.S. 393, 402 (1975). These con-

ditions are satisfied here. ,

In contesting the standing of the two plaintiffs who filed

applications, the defendants point out that eligibility for

lower-income housing is not determined until an applicant

reaches the head of the waiting list and a vacancy opens

up; until then no one can be sure that an applicant would

benefit from a favorable decision in this suit. But if the

applicant could not sue till there was a vacancy, his suit

for an injunction—the premise of which is that the waiting

list would be shorter if twice as many apartments were

being offered to lower-income families—would be moot as

soon as it was ripe.

These two plaintiffs claim without contradiction to have

satisfied the formal requirements for eligibility, to have

made an application, and to have been placed on the wait-

ing list, and they will get to the head of the list sooner

if the developers are ordered to double the number of

apartments offered to lower-income persons. So they stand

to gain a real benefit from winning this suit. It is true

that even if an applicant is formally eligible and makes

his interest clear by filling out an application, the de-

veloper to whom he has applied may decide not to rent

to him; the developer has considerable discretion in this

regard, as emphasized in Eidson v. Pierce, 745 F.2d 453,

460-61 (7th Cir. 1984), and Hill v. Group Three Housing

Development Corp., 799 F.2d 385, 392-93 (8th Cir. 1986).

Or the applicant may lose interest before he gets to the

top of the list. Or the list might be so long, and the ap-

plicant so far from the top, that even if the list were

shortened because the number of available apartments had

doubled he could never hope to reach the top. But these

Se |

ee ee 8 ee ee Ue

} ’ } t

No. 86-1906 D

possibilities do not defeat standing. A reasonable probabil-

ity that a plaintiff will get an apartment that he wants

sooner if he wins his suit is a sufficie:tly tangible ex-

pected benefit of suit to confer standing under the liberal

principles that prevail nowadays, as is demonstrated by

Village of Arlington Heights v. Metropolitan Housing

Development Corp., 429 U.S. 252, 264 (1977), a factually

similar case. If despite the facts we have recited, which

make out a prima facie case of standing, neither plaintiff

had a reasonable probability of benefiting from a success-

ful conclusion to this suit, this was something for the

defendants to show by producing evidence, which they

made no effort to do.

Coming to the merits, we first address the claim that

the contracts between the developers and IHDA have

been broken and that the plaintiffs are entitled to com-

plain about the breach. The questions are intertwined.

There is little doubt that the contracts at one time re-

quired the developers to set aside 40 percent of the apart-

ments for lower-income families (actually only 32 percent,

for reasons explained later, but this makes no difference);

for if the 40 percent figure was merely a maximum the

contracts contained a tremendous loophole that would

have enabled the developers to receive a mortgage sub-

sidy from IHDA even if they never rented a single apart-

ment to a lower-income person. But the nominal parties

to the contracts are IHDA and the developers, and they

modified the contracts to reduce the percentage to 20 per-

cent. If the plaintiffs are third-party beneficiaries, how-

ever, this modification, having been made without their

consent, may not have been effective. See Restatement

(Second) of Contracts § 311 (1979). Or may have been, as

we shall see.

A footnote in the plaintiffs’ opening brief asserts that

the law governing the contract issues is federal common

law. As the defendants take no issue with this assertion

we shall treat it as a binding stipulation; we have noted

many times that parties to a lawsuit are, within broad

limits, entitled to determine what law shall govern their

6 No. 86-1906

dispute. E.g., Casio, Inc. v. S.M. & R. Co., 755 F.2d 528,

531 (7th Cir. 1985). But since parties cannot confer federal

jurisdiction by stipulation, they cannot confer federal juris-

diction by agreeing that their dispute shall be governed

by federal law if, were it not for the stipulation, the suit

would arise under state law. McCall-Bey v. Franzen, 777

F.2d 1178, 1186 (7th Cir. 1985). Now it is true that even

if the contractual dispute in this case were governed by

state law, it could be deemed a pendant to the plaintiffs’

federal statutory and constitutional claims—and this de-

spite the fact that the defendants are different (the heads

of HUD and IHDA rather than the developers); for we

recognize ‘‘pendent party” jurisdiction where the main

claim is a federal-question rather than diversity claim. See

Moore v. Marketplace Restaurant, Inc., 754 F.2d 1336,

1360 (7th Cir. 1985). (The citation is to one of the separate

opinions, but it stated the view of the majority on this

point. See id. at 1361.) However, the plaintiffs’ federal

claims were all resolved before trial; so in the absence

of special circumstances (not shown here) the district court

would have had to relinquish pendent jurisdiction over the

contract claims rather than resolve them on the merits.

United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966).

Hence it becomes important to decide whether they are

federal or state in nature.

Both Holbrook v. Pitt, 643 F.2d 1261, 1270 n. 16 (7th

Cir. 1981), a suit quite like this, as we shall see, though

brought by tenants rather than applicants for subsidized

housing under section 1437f, and D’Amato v. Wisconsin

Gas Co., 760 F.2d 1474, 1478-80 (7th Cir. 1985), an at-

tempt to sue a contractor for wrongful discharge on the

basis of a contract between the contractor and the govern-

ment, held that the issue of third-party beneficiary status

was to be decided as a matter of federal common law;

and there is much to be said in support of this result.

Section 1437f(bX2) contemplates that HUD will enter di-

rectly or (as here) indirectly (HUD approved the contracts

that the plaintiffs allege the developers broke) into con-

tractual relations with developers all over the country,

]

| '

oni

No. 86-1906 7

- and the nature and feasibility of those contracts may de-

—_ in part on who can sue in the event of a breach.

he issue is potentially so important to the success of the

rogram—since on its resolution may turn the amount of

ower-income housing actually provided—that we believe

that Congress, had it thought about the matter, would

have wanted the question to be decided by federal courts

applying a uniform principle.

Moreover, although in form the question presents itself

as whether a state or federal rule of third-party benefici-

aries shall be applied to this case, in substance the ques-

tion is what remedies shall be available for breach of a

contract designed to effectuate the program of economical-

ly mixed housing. The question whether prospective ten-

ants can sue, as well as signators of the contracts, is much

like the question whether a particular federal statute cre-

ates an implied right of action in favor of its beneficiaries,

a question invariably treated as one of federal law be-

cause it involves (under the current view of implied rights

of action) interpretation of the statute. See, e.g., Touche

Ross & Co. v. Redington, 442 U.S. 560, 568 (1979).

Miree v. DeKalb County, 433 U.S. 25 (1977), however,

must give us pause. Victims of an airline crash brought

a diversity suit against the owner of an airport, and

argued that they were third-party beneficiaries of a con-

tract between the airport and the Federal Aviation Ad-

ministration obligating the airport to take certain precau-

tions. The Court held that whether they were third-party

beneficiaries was a matter of state, not federal, law. The

Court noted that the Solicitor General of the United States

had declined to participate in the appeal, advising the

Court that the resolution of the plaintiffs’ breach of con-

tract claim would not have any direct effect on the United

States. See id. at 29-30. That is not true in this case; but

it is noteworthy that the Court went out of its way to

reject the suggestion that there was a sufficient federal

interest in the question “‘insofar as such lawsuits [i.e.,

third-party beneficiary suits by the victims of air crashes]

might be thought to advance federal aviation policy by

8 No. 86-1906

inducing compliance with FAA safety provisions.” Jd. at

32. The federal interest in the present case could be de-

scribed in similar terms: an interest in the effect on com-

pliance with the objectives of the program of economically

mixed housing if applicants for such housing are allowed

to sue to enforce the developers’ commitments to IHDA

and HUD.

This language in Miree is dictum, however, and there-

fore did not bind us in deciding Holbrook-and_D’Amato.

The argument for a federal rule is particularly strong in

these housing cases; as we suggested earlier, it would be

odd to think that a suit by tenants and applicants for fed-

erally subsidized housing against developers of such hous-

ing for breach of contracts approved by HUD and fun-

damental to the achievement of HUD’s objectives under

section 1437f would have to be brought in state court and

decided in accordance with state contract law. The case

for federal law was much weaker in Miree, and we are

not obliged to apply all of its language to a case not re-

motely in the contemplation of the Justices.

There is another wrinkle, however. Merely because the

issue of third-party beneficiary status is one of federal

common law, it need not follow that the suit by a third-

party beneficiary to enforce the contract arises under fed-

eral rather than state law, thus entitling the plaintiff to

bring the suit in a federal rather than state court. The

plaintiffs in this case are suing for breach of contract;

establishing their status as third-party beneficiaries merely

gives them standing to argue breach. But the reasons that

persuade us, notwithstanding the dictum in Miree, that

the issue of third-party beneficiary status should be

treated as one of federal law rest fundamentally on the

desirability of a uniform interpretation of these contracts

(at least of the provisions requiring federally subsidized

lower-income housing), and that will best be achieved by

allowing suit in federal courts. We do not suggest, how-

ever, that there would be federal jurisdiction of a suit

unrelated to commitments made in implementation of the

Section 8 program—a suit, for example, over compliance

EeeEeeBeEEEHEEHEEEEEE GB iI

No. 86-1906 9

with contractual provisions relating only to the parts of

* an apartment development that were not committed for

rental to lower-income families, hence not involved in the

federal subsidy program.

The next question is whether, as a matter of federal

common law, the plaintiffs should have a right to main-

tain a suit on the contract between the developers and

IHDA. In Holbrook we held that tenants under federal

housing programs are third-party beneficiaries of the con-

tracts between HUD (or, by implication, an agent, such

as IHDA) and developers of lower-income housing. 643

F.2d at 1269-73. The holding was based on our answer-

ing “yes” to the question: “did the contracting parties

intend that the third party benefit from the contract?”

Id. at 1270 n. 17. In view of our approving discussion of

the provision in the Restatement of Contracts that “a

beneficiary of a promise is an intended beneficiary if rec-

ognition of a right to performance in the beneficiary is

appropriate to effectuate the intention of the parties,”

Restatement, supra, § 302 (Holbrook quoted an earlier

version of this provision, but one unchanged in the final

version), and our statement that “it is improper to neglect

the reasonable expectations of the promisor, since the

burden of the agreement to the promisor, and therefore

the consideration he will require, may vary according to

the number of parties who have enforceable rights under

the contract,” 643 F.2d at 1270 n. 17, an equivalent for-

mulation of our test is whether the contracting parties

intended the third party to have a right to sue in the

event of breach. See also Nguyen v. United States Cath-

olic Conference, 719 F.2d 52, 55 (3d Cir. 1983); Roberts

v. Cameron-Brown Co., 556 F.2d 356, 362 (5th Cir. 1977).

An affirmative answer was at least plausible in Holbrook;

HUD would hardly wish to undertake the burden of suing

for breach of contract every time a developer violated his

duty toward a tenant. Granted, this explanation for the

decision is in tension with the fact that HUD was opposing

the recognition of third-party beneficiary status. But may-

be it had just changed its mind; in any event it seemed

10 No. 86-1906

more sensible to us to make the developer’s undertak-

ings to the tenant in the contract with HUD in effect an

additional term of the tenant’s lease than to place the en-

tire burden of enforcement on HUD, and it was also a

result consistent with the statutory objectives.

An inference of third-party beneficiary status is less

plausible in the case of a mere applicant for subsidized

housing. Cf. Eidson v. Pierce, supra, 745 F.2d at 460-62.

Although it can be argued that such applicants are not

merely incidental beneficiaries of the contracts with the

developers, as were the plaintiffs in D’Amato v. Wiscon-

sin Gas Co., supra, 760 F.2d at 1480, to give each appli-

cant for subsidized housing the status of a party to the

contract would make almost every lower-income person

in the United States a potential plaintiff and would thus

be inconsistent with the Restatement’s provision on third-

party beneficiaries of government contracts. See Restate-

ment, supra, § 313(2). A developer who signed a contract

with IHDA would be buying potential legal trouble not

only with the relative handful of lower-income families to

which he might actually rent but with all the lower-income

families in the region who might desire and be eligible

to rent apartments that he had committed to such fami-

lies. The parties suggested that there might be 30,000

eligible persons in DuPage County alone, one of three

counties in which the apartments at issue in this case are

located. Of course many such suits might fail for want

of standing, but that is not a good argument for deem-

ing the plaintiffs third-party beneficiaries. On the contrary,

the original parties to a contract would hardly want to

create rights of action in so indefinite a class as to raise

a serious question whether the members would actually

be allowed to enforce their rights. It is implausible that

the developers, IHDA, or HUD ever intended to impose

so novel and ill-defined a burden on themselves or that

it would advance the objectives of the Section 8 program

if they did; so wide a net of liability could make devel-

opers reluctant to participate in the program.

No. 86-1906 11

We hold that the developers did not assume contractual

liability to applicants, but we would affirm the dismissal

of the plaintiffs’ breach of contract claim even if they had.

Unless a contract expressly prohibits the parties from

modifying their duties to intended beneficiaries, which the

contracts in this case do not do, the parties can modify

the contract without any such beneficiary’s consent unless

and until he justifiably relies on it. See Restatement,

supra, § 311; Karc v. San Diego Symphony. Orchestra

Ass'n, 762 F.2d 819, 822 (9th Cir. 1985); Detroit Bank &

Trust Co. v. Chicago Flame Hardening Co., 541 F. Supp.

1278, 1282-83 (N.D. Ind. 1982). No reliance, justifiable or

otherwise, has been shown or suggested here. The wisdom

of the rule is shown by the circumstances of this case.

It would be absurd to freeze the developers, IHDA, and

HUD into the original terms of the contracts, no matter

what the circumstances calling for modification; and frozen

they would be, sitice it would be infeasible, or at least

very burdensome, to negotiate a release from all appli-

cants for lower-income housing.

And since the contracts were lawfully modified, HUD

cannot be faulted for having refused to enforce them ac-

cording to their original tenor. So we need not decide

whether this case falls within any of the exceptions to

the rule that agency inaction is inactionable. See Heckler

v. Chaney, 470 U.S. 821 (1985).

The next issue is statutory violation. Although section

1437f(bX2) does not create a private right of action either

explicitly or by implication, see Hill v. Group Three Hous-

ing Development Corp., supra, 799 F.2d at 394-95, the

Supreme Court held recently that section 1 of the Civil

Rights Act of 1871, now 42 U.S.C. § 1983, may be used

as a vehicle for suing state housing officials, such as the

head of IHDA, for depriving lower-income tenants of their

rights under federal housing law. Wright v. City of Roanoke

Redevelopment & Housing Authority, 107 S. Ct. 766

(1987). But there was no violation of the 1974 statute, and

the 1981 statute is not retroactive. The 1974 statute says

nothing about developers’ having to rent to lower-income

12 No. 86-1906

families all the apartments they have committed to rent

* to them, and there is no pertinent legislative history. Of

course the developers can’t get federal subsidies for apart-

ments not rented to lower-income families, see 42 U.S.C.

§ 1437f(cX4), but they have not tried to. Developers who

do not rent all the “committed” units free up federal sub-

sidies for other developers.

The concept of economically mixed housing was new in

1974 and no one knew what the optimum mixture was.

Housing ordinarily is segregated by income; and though

the draftsmen of the 1974 statute wanted to change this,

they did not stipulate to a minimum percentage of lower-

income people in developments that received rental sub-

sidies under the statute or even require state housing

agencies to hold developers to whatever commitments

they made. Apartments not rented to lower-income fami-

lies would be ineligible for rental subsidies, but the

developer would not be penalized (at least under the stat-

ute) for not renting to as many lower-income families as

he had promised to rent to. The statute even contains

a provision giving preference to projects in which no more

than 20 percent of the units are reserved for lower-income

people, see 42 U.S.C. § 1437f(cX5), which is the percent-

age to which the developers retreated here, albeit in dero-

gation of their original commitment to IHDA. Congress

was evidently alert to the danger of “‘tipping’’; it did not

require such high percentages that tipping would become

highly likely.

It is true that HUD early on promulgated a regulation

which requires developers to rent no more than 20 per-

cent of the units reserved for lower-income housing to in-

eligible tenants. See 24 C.F.R. § 883.327 (1979, but in

force from 1975 on). But this regulation, which (as amended

in 1980, see 24 C.F.R. § 883.605) states expressly that

a developer who vivlates it is breaking his contract, rep-

resents we believe an exercise of HUD’s power to make

contracts implementing the statute rather than an inter-

pretation of a statutory duty of developers to adhere to

their contractual commitments. (It is the 20 percent lee-

[

No. 86-1906 13

way in the regulation that caused us to say earlier that

the developers’ commitment was actually 32 percent

rather than 40 percent.) HUD could decide to extract an

ironclad (or, rather, an 80 percent ironclad) commitment

from developers, or it could decide to delegate to state

agencies such as IHDA the decision of how closely to hold

the developers to their commitments in the face of such

changed circumstances as experience might reveal. Notice

by the way how giving applicants for lower-income hous-

ing the status of third-party beneficiaries would reduce

HUD's flexibility, unless—as we also believe—contracts

can be modified by their original parties without leave

of any third-party beneficiaries until the latter have

justifiably relied on the original provisions.

When the General Accounting Office (not HUD) discov-

ered that developers were not fulfilling their commitments,

it was distressed and applied pressures that eventuated

in the 1981 amendment. See for example the ominously

entitled Report by the Comptroller General of the United

States: Lenient Rules Abet the Occupancy of Low Income

Housing by Ineligible Tenants (U.S. Gen’] Accounting Off.,

CED-81-74, April 27, 1981). But the plaintiffs’ argument

that the amendment merely clarified the 1974 statute is

untenable. The explicit denial of retroactive application

argues the contrary, and there is nothing to be clarified

about the 1974 statute so far as any obligation to fulfill

contractual commitments is concerned: there is no hint of

such an obligation. Finally, the legislative history contains

no suggestion that the purpose of the 1981 amendment

was merely to clarify the original statute.

The repeal of the provisions of the economically mixed

housing statute relating to newly constructed and substan-

tially rehabilitated housing, just two years after the 1981

amendment, suggests that IHDA may have been on the

right track in onine the developers to renege on their

commitments. Economically mixed housing is a noble idea

but also a precarious one. If the percentage of poor peo-

ple in a project rises too far, the other tenants may leave,

14 No. 86-1906

and the purpose of the program be defeated. Maybe 20

percent is the highest feasible percentage of poor people

(not that all lower-income people as defined by the statute

are poor) in such_a program, and the GAO’s pressure for

a higher percentage merely accelerated the program’s

demise. But the only important point is that the 1974

statute did not contain the inflexible requirement on which

the plaintiffs rely.

The last issue is whether IHDA and HUD deprived the

plaintiffs of their property without due process of law.

Since the defendants did not violate the statute and the

plaintiffs had no contract rights, the plaintiffs were not

deprived of any entitlement, and hence of any property.

Compare Eidson v. Pierce, supra, 745 F.2d at 457-64. So

this claim fails, too; and the judgment for the defendants

must be, and is,

| AFFIRMED.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA 79004—Midwest Law Printing Co., Inc., Chicago—7-8-87—450

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

Chicago, Illinois 60604

August 4, 1987

Before

Hon. HARLINGTON WOOD, JR., Circuit Judge

Hon. RICHARD A. POSNER, Circuit Judge

Hon. DANIEL A. MANION, Circuit Judge

AUDREY PRICE, et al.,

Plaintiffs-Appellants,

SAMUEL PIERCE, et al.,

)

vs. ) No. 86-1906

}

Defendants-Appellees. )

ORDER

On July 22, 1987, plaintiffs-

appellants filed a petition for rehearing

with suggestion for rehearing en banc.

All of the judges on the original panel

have voted to deny the petition, and none

of the active members of the court! has

requested a vote on the suggestion for

rehearing en banc. The petition is

therefore DENIED.

thon. Frank H. Esterbrook did not

participate in the consideration of the

Suggestion for rehearing en banc.

Audrey PRICE, et al., Plaintiffs,

Vv.

Samuel PIERCE, etc., etal.,

Defendants.

No. 83 C 6291.

United States District Court,

N.D. Illinois, E.D.

June 25, 1985.

MEMORANDUM OPINION AND ORDER

WILLIAM T. HART, District Judge.

The Hope Fair Housing Center

("HOPE") and the six individually named

plaintiffs brought this action against

Secretary of Housing and Urban *

Development Samuel Pierce (the

"Secretary"), the Illinois Housing

Development Authority ("IHDA"), and-the

owners of six “Section 8" housing

complexes located in this District (the

"Developers"). Their complaint seeks

"full utilization" of housing subsidies

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contractually allocated for use by low

and moderate income families at the

apartment complexes owned by the

defendant Developers. Initially, the

plaintiffs sought to enforce a policy of

full utilization by invoking: (i) their

Fifth and Fourteenth Amendment due

process rights; (ii) an implied private

right of action under the Housing Act of

1937, as amended (referred to as "Section

8"), 42 U.S.C. §$§1437£ et seg.; (111)

section 1983 as a remedy for violations

of their rights under (i) and (ii); (iv)

judicial review of the Secretary's

actions pursuant to the Administrative

Procedure Act ("APA"), 5 U.S.C. §706; (Vv)

their rights as third party beneficiaries

under contracts between the Secretary,

IHDA and the Developers; and (vi) an

implied right of action under the

Illinois housing laws.

By order entered November 28,

1983, the Court dismissed the plaintiffs'

third party beneficiary claim and refused

to recognize an implied private right of

action under the Housing Act, but

rejected the defendants' assertion-that

the plaintiffs had no property right in

Section 8 benefits sufficient to sustain

their due process and §1983 claims.

Also, in the November 23rd order, the

Court reserved ruling on the defendant's

challenge to Hope's standing as a

plaintiff, pending the Seventh Circuit's

decision in a similar case.

On April 4, 1984, this Court

certified a class of plaintiffs who were

financially eligible for Section 8

assistance and otherwise acceptable for

tenancy at the defendant Developers'

apartment complexes but had been

adversely affected by the alleged policy

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of underutilization.! In addition, the

Court acting sua sponte, dismissed IHDA

as a party defendant to the plaintiffs’

§1983 and state law claims based on the

Supreme Court's decision in Pennhurst

State School and Hospital v. Halderman,

465 U.S. 89, 104 S.Ct. 900, 79 L.Ed.2d 67

(1984). As a result of a series of

motions to reconsider, clarify and join

additional parties, on November 13, 1984

the plaintiffs filed a fourth amended

complaint, which dismissed IHDA as a

party defendant and joined IHDA officials

A.D. Van Meter and James Kiley (together

the "State defendants") as defendants to

their due process and §1983/federal

housing act claims.

lfhe precise definition of the class

is set forth at p. 11 of the April 4th

order.

Currently before the Court are

the parties’ cross-motions for summary

judgment on the claims advanced in the

plaintiff's four-count fourth amended

complaint({denial of property without due

process, violation of rights under the

federal housing laws, judicial review of

the Secretary's actions, and violation of

state housing laws).

STANDING

[1] Initially, the State

defendants' challenge to the plaintiffs'

standing to maintain this action must be

resolved. The State defendants maintain

that the Seventh Circuit's decision in

Hope, Inc. v. County of DuPage, 738 F.2d

797 (7th Cir.1984), mandates a finding

that neither Hope nor the individual

plaintiffs have standing to maintain this

action. In County of DuPage, the Seventh

Circuit found that the plaintiffs lacked

ome it ae 2 a Coe Clu

standing to challenge alleged County

Board practices where they had failed to

identify specific housing projects

affected by the challenged practices, as

required by Warth v. Seldin, 422 U.S.

490, 95 S.Ct. 2197, 45 L.Ed.2d 343

(1975). County of DuPage is no bar to

the standing of the individual plaintiffs

here, as they have alleged (and shown)

that the challenged practice of

“underutilization: affected tne

availability of housing at six specific

apartment complexes where they are

applicants for housing.

[2] This Court reserved ruling

on Hope's asserted standing as a

representative of its members and in its

own right while the County of DuPage was

being argued. The Seventh Circuit did

not base its ruling on grounds which

would differentiate Hope from the

individual plaintiffs. Rather, the

Seventh Circuit found that since Hope's

standing was no better than that of the

individual plaintiffs, it too lacked

standing. County of DuPage also refused

to expand Hope's representational

standing beyond its members to include

all those for whom Hope seeks housing.

Here, Hope has presented the claim of

particularized injury that was lacking in

County of Dupage. Hence, Hope has

standing both as a representative of its

meinbers (who are otherwise within the

Class as certified) and in its own right

to maintain this action. See Havens

Realty Co. v. Coleman, 455 U.S. 363, 378-

79, 102 S.Ct. 1114, 1124, 71 L.Ed.2d 214

(1982).

DUE PROCESS CLAIMS

All defendants assert that in

light of the Seventh Circuit's recent

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decision in Eidson v. Pierce, 745 F.2d

453 (7th Cir.1984), the plaintiffs‘ due

process claims fail for want of a

property right requiring due process

protection. The State defendants go on

to assert that Eidson also precludes the

plaintiffs' $1983 claim, which is based

upon a violation of purported rights

established by the federal housing laws.

Eidson involved an effort by

applicants for Section 8 housing at

apartment complexes in Indiana and

Wisconsin to secure hearings and a

written explanation of the reasons for

their rejection by project owners. As do

the plaintiffs in this action, the Eidson

plaintiffs argued that financially

eligible applicants enjoy a property

right to Section 8 benefits deserving due

process protection. The Seventh Circuit

flatly rejected their asserted property

right.

[3] The plaintiffs contend that

this case is distinguishable from Eidson

as it involves a challenge to the total

amount of Section 8 housing available to

all applicants rather than “the process

used to allocate these limited and

valuable benefits among a large number of

eligible applicants' examined in Eidson.

745 F2d at 457. However, a fair reading

of Eidson does not support this

distinction. This Court's November 23rd

order, which denied the defendant's

motion to dismiss the due process claim,

recognized but rejected the

tenant/applicant distinction adopted by

the district courts in Eidson and Germain

v. Recht-Goldin-Seigel Properties

(consolidated on appeal with Eidson). In

rejecting the tenant/applicant

distinction, this Court relied upon

. Ressler v. Pierce, 692 F.2d 1212 (9th

Cir.1982) and Davis v. Ball Memorial

Hospital Ass'n, 640 F.2d 30 (7th

Cir.1980). However, in Eidson the

Seventh Circuit adopted the tenant/

applicant distinction, rejected the

rationale of Ressler and limited the

reach of Davis. The relevant distinction

mandated by Eidson is between procedural

rights to preserve the existing amount of

procedures to allocate housing among

applicants. Since the plaintiffs here

are all applicants, their due process

Claims are foreclosed by Eidson.

SECTION 1983 CLAIM

Moreover, Eidson also defeats

plaintiffs' §1983 claims based on the

federal housing statute. The plaintiffs

rely upon Maine v. Thiboutot, 448 U.S. l,

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100 S.Ct. 2502, 65 L.Ed.2d 555 (1980),

for the proposition that "a federal

statute creating enforceable rights may

be enforced in a Section 1983 action,"

despite the absence of any implied

private right of action under the statute

itself. However, the plaintiffs'

argument assumes its conclusion. The

Seventh Circuit in Eidson found that

"there is nothing to suggest that

Congress intended potential tenants of

Section 8 projects to have enforceable

rights to Section 8 housing in particular

projects." 745 F.2d at 462.

[4,5] The Supreme Court has

recognized two exceptions to the

application of §1983 to federal statutes,

one of which precludes plaintiffs' §1983

Claim. No §1983 claim may be based on a

federal statute which fails to create

“enforceable rights." See Middlesex City

Sewerage Authority v. Sea Clammers, 453

U.S. 1, 9, 101 S.Ct. 2615, 2620, 69

L.Ed.2d 435 (1981) (explaining Pennhurst

State School and Hospital v. Halderman,

633 U.8. i, 2180 161 8.Ce. 1931, 1566, 67

L.Ed.2d 694 (1981)). See also Gould,

Inc. v Wisconsin Dept. of Industry, Labor

& Human Relations, 750 F.2d 608, 615-16

(7th Cir.1984); Polchowski v. Gorris, 714

F2d 749, 750-51 (7th Cir. 1983). Thus,

the plaintiffs' $1983 claim rises or

falls with its due process claim, as both

assert 42 U.S.C. §1437£ to be the source

of enforceable rights. Since Eidson has

established that applicants (as opposed

to tenants) for Section 8 housing have no

“enforceable right" to benefits, see 745

F.2d 461 n.6, that portion of the federal

housing law provides no basis for a §1983

Claim. Accord Phelps v. Housing

Authority of Woodruff, 742 F.2d 816, 820-

22 (4th Cir.1984). But see Tedder v.

Housing Authority of Paducah, 574 F.Supp.

240, 246-48 (W.D.Ky.1983).

STATE LAW CLAIMS

[6,7] Due to the disposition of

the plaintiffs' due process and §1983

claims, their pendent claims based on

state housing statutes, must be

dismissed. After the entry of summary

judgment on Counts I and II, the only

claim remaining against the defendant

Developers is the plaintiffs' claim under

the state housing laws (Count IV). In

the absence of benefits in the for of

judicial economy, convenience or fairness

to litigants, “federal courts should be

reluctant" to adjudicate state law

claims. Buethe v. Britt Airlines, Inc.,

749 F.2d 1235, 1240 (7th Cir.1984)

(quoting Smith v. No. 2 Galesburg Crown

Finance Corp., 615 F.2d 407 (7th

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Cir.1980). Such a reluctance should be

particularly pronounced where the state

law claim involves an issue of first

impression or an unsettled area of state

law as is presented here. Buethe, 749

F.2d at 1240-41. In addition, the’

plaintiffs' state law claim against the

Developers is a pendent party claim not

closely related to the remaining federal

law claim against the Secretary. Compare

Berstein v. Lind-Waldock & Co., 738 F.2d

179, 187-88 (7th Cir. 1984) with Moore v.

Marketplace Restaurant,’Inc., 754 F2d

1336, 1359-63 (7th Cir.i985). For these

reasons, the plaintiffs; state law claim

is dismissed without prejudice.

ADMINISTRATIVE REVIEW CLAIMS

The plaintiff's remaining claims

are that the Secretary has: (i)

unlawfully withheld action which would

compel the Developers and IHDA to fully

utilize authorized Section 8 subsidies;

and (ii) abused his discretion by

approving proposed contact modifications

which would reduce the number of

authorized Section 8 units at five of the

Six apartment complexes involved in this

action. | ~

[8,9] Section 706(1) of the APA,

5 U.S.C. §706(1) empowers federal courts

to "compel agency action unlawfully

withheld" (emphasis added). Judicial

review of claims of agency inaction is

extremely limited. Illinois Bell

Telephone Co. v. F.C.C., 740 F.2d 465,

475-76 (7th Cir.1984). Further, the

Secretary enjoys considerable discretion

in making enforcement decisions. See

United States v. OCCI Co., 758 F.2d 1168,

1164-65 (7th Cir.1985) (foreclosure on

federally insured mortgage for low and

moderate income housing project). The

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Secretary argues that his failure to take

action to remedy the underutilizationn at

the five apartment complexes owned by the

defendant Developers was not unlawful, as

no applicable statute required full

utilization. |

[10] The plaintiffs concede that

the 1981 amendments to Section 8 do not

apply to the apartment complexes here at

issue. Although Congress mandated full

utilization as part of the 1981

amendments, it provide that the full

utilization requirement would apply only

to contracts entered into on or after

October 1, 1981. PL 97-35 §§325(1) and

371(b), 95 Stat. 406, 431 (Aug. 13,

1981). Plaintiffs' attempt to construct

a statutory requirement of full

utilization from various other portions

of Section 8 is unpersuasive. Thus, the

Secretary's failure to act was not

unlawful and enforcement action cannot be

compelled under 5 U.S.C. §706(1).

[11,12] The Secretary's approval

—ef a reduction in the number of Section 8

assisted units at five of the six

apartment complexes, however, stands on a

different footing. Pursuant to 5 U.S.C.

§706(2)(A), this Court must review the

Secretary's decision to determine whether

the decision was based on a consideration

of the relevant facts and whether there

has been a clear error of judgment."

Citizens To Preserve Overton Part v.

Volpe, 401 U.S. 402, 416, 91 S.Ct. 814,

824, 28 L.Ed.2d 136 (1971). Nonetheless,

this standard of review is also narrow

and this Court may not "substitute its

judgment for that of the agency.” Id.

Even where an abuse of discretion is

shown, the proper remedy is a remand to

the Secretary rather than the

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substitution of this Court's judgment for

that of the Secretary. Flynn v. Schultz,

748 F.2d 1186, 1194 (7th Cir. 1984).

With this deferential standard in mind,

the Court examines the record supporting

the Secretary's decision.

Under the Section 8 program, the

Secretary is authorized to implenent the

program by entering into annual

contributions contracts ("ACC") with a

"public housing agency,” pursuant to

which such agency may enter into housing

assistance payments ("HAP") contracts

with owners of dwelling units to assist

eligible persons. IHDA is a public

housing agency within the meaning of

federal statute and is geverned by

federal regulations at 24 C.F.R.

§883.101, et seg. IHDA was established

pursuant to Illinois state law.

I11.Rev.Stat. ch. 67 1/2, Paragraph 301

et seq. IHDA has provided “assisted

mortgage financing"? for each of the six

developments in this action, pursuant to

state statute. I11.Rev.Stat. ch. 67 1/2,

Paragraph 307.2.

(1) Trails Venture .

The Moorings, located in DuPage

County is owned by defendant Trails

Venture, an Illinois limited partnership.

In 1976, IHDA requested that the

Department of Housing and Urban

Development ("HUD") increase the Section

8 subsidy allocation at the Moorings to

40% (86 units) of the dwelling units of

that development. IHDA stated in part:

As always the Authority evaluates

the economic housing needs of

each community where a project is

proposed and correspondingly

2under Illinois law “assisted

mortgage financing” means a below market

rate mortgage, insured or purchased, in

combination with a program of rent

supplements and other grants.

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ee,

requests the appropriate amount

of housing subsidies required for

the community to be served as

determined by our housing need

study... It is our conclusion,

after analyzing present housing

cost and family income patterns,

that 40% of the dwelling units

should be assisted with Section 8

housing assistance payments in

conformance with our housing

needs study... In view of the

foregoing, it is imperative that

the subsidy be available to allow

us to assist very low, low and

moderate income families in the

spirit and intent of the

congressional mandate enumerated

through the Housing and Community

Development Act of 1974.

On April 7, 1976, HUD approved

the IHDA proposal for the Moorings. On

May 4, 1976, HUD and IHDA signed an ACC

for the purpose of making Section 8

subsidies available for 86 units at the

Moorings through execution of a HAP

contract with the owner. On May 4, 1976,

IHDA and defendant Trails Venture signed,

and HUD subsequently approved, an

Agreement to Enter Into HAO Contract,

"for the purpose of making housing

payments to enable eligible Lower-Income

Families to occupy units in said

project.”

In March, 1977, IHDA and Trails

Venture signed a HAP contract, approved

by HUD inn May, 1977, providing in part

that:

The Contract Units [§8 units] are

to be leased by the owner to

eligible lower-income families

("Families") for use and

occupancy by such families solely

as private dwellings... The HFA

[IHDA] hereby agrees to make

housing assistance payments on

behalf of families for the

contract units to enable such

- families to Decent, Safe and

Sanitary Housing pursuant to

Section 8 of the act.

From the time of initial

occupancy until September 1983, the

Moorings rented no more than 43

apartments to eligible low income

tenants. On August 26, 1983, IHDA and

Trails Venture amended the contracts,

’ _—

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reducing the available Section 8

allocation from 86 to 68 Section 8 units.

HUD approved this change.

(2) Arrowhead Apartment Associates

Arrowhead Village, located in

Cook County, is owned by defendant.

Arrowhead Apartment Associates, an

Illinois limited partnership. Arrowhead

Village was previously owned by defendant

Groves of Hidden Creek, an Illinois

limited partnership.

In 1976, IHDA by and through its

Director, requested from HUD an increase

in the Section 8 subsidy allocation at

Arrowhead Village to 40% of the dwelling

units at that development (80 units).

IHDA made the identical representation

quoted at page 11 of this opinion.

On February 12, 1976, HUD

approved the IHDA proposal for Arrowhead.

On June 30, 1976, HUD and IHDA signed an

ACC for the purpose of making Section 8

Subsidies available (80 units) at the

Groves of Hidden Creek through execution

of a HAP contract with the owner and HUD

subsequently approved the agreement. On

March 24, 1976, IHDA and Groves of: Hidden

Creek signed a HAP contract, approved by

HUD in May, 1977, containing the

identical provision quoted at page 179 of

this opinion.

On April 19, 1982 in a letter to

Arrowhead Village, HUD Area Manager Elmer

Binford stated:

We are deeply concerned since our

records indicate that of the 80

units under your Section 8

Contract, less than 50% (39

units) are currently under lease

to eligible Section 8 tenants.

Current regulations found in 24

CFR Part 883.605(a) require that

no more than 105 of assisted

units be leased to ineligible

tenants without prior HUD and

State Agency (IHDA) approval.

Failure to lease to eligible

tenants is a violation of your

Contract and constitutes grounds

for all available legal remedies,

including specific performance of

the Contract suspension or

debarrent [sic] from hud programs

and reduction of the number of

units under the contract.

Within 10 days following your

receipt of this letter, we

request your written response to

the charge made by Mr. ‘Barnett

and a justification of your

failure to lease Section 8 units

to eligible tenants. A copy of

this letter is being forwarded tc

the Illinois Housing Development

Authority.

On June 9, 1982, in a letter to

Arrowhead Apartments, HUD area manager

Elmer Binford stated:

Regarding the matter of your

agency's failure to lease Section

8 units to eligible tenants, your

response completely ignores this

issue. In addition, you have

provided us a copy of a response

to the Barnett's from Donnell D.

Jenkins, Amdur Associates, Inc.,

Property Manager, that contains

statements that contradict

information contained on official

HUD reports. Specifically, HUD

Form 52684, Report on Prograin

Utilization, which was filed on

behalf of Arrowhead Apartments,

by the Illinois Housing

Development Authority indicates

that as of January 13, 1981 only

39 of 80 units (50%) were leased

to eligible tenants. Further

information received by this

office indicates that as of May,

1982, this situation has not

improved. Any unauthorized

policy of leasing to ineligible

tenants above the allowable

program limit results in the

unlawful deprivation of

FPederally-funded rental

assistance to eligible Section 8

applicants. This policy is

especially disturbing since your

agency acknowledges a very

lengthy waiting list for Section

8 at Arrowhead.

As was indicated in our letter of

April 19, 1982, failure to lease

to eligible tenants is a

violation of your Housing

Assistance Payments contract and

grounds for all available legal

remedies. In addition, your

unauthorized policy has the

effect of depriving those

eligible families of their

constitutional right to

participate in this Federally-

funded program.

On June 15, 1982, ina letter to

IHDA deputy Director, Peter Dwars, HUD

Area manager Elmer Binford stated:

Recently, it has come to our

attention that ILO6-H121-007,

OO —

Arrowhead Village, has

consistently violated Federal

regulations by leasing Section 8

units to ineligible tenants ina

percentage that exceeds statutory

limits. We had requested that

the owner of this project provide

this office with some

clarification of this

unauthorized procedure. As the

result of our request, we were

informed by an IHDA employee that

your agency would provide an

adequate response.

In a June 15, 1981 letter froin

Mr. Delong, we were provided with

a response that we feel is less

than adequate. We concur in Mr.

Delong's analysis that this

project is governed by

regulations that were in effect

prior to February 29, 1980,

however, we are not aware of any

Federal regulations that allow a

project owner to lease more than

20% of its Section 8 units to

ineligible tenants. IL06-H121-

007 has consistently leased more

than 50% of its Section 8 units

to ineligible families.

We would appreciate your response

to this matter inasmuch as our

records show that this project is

being managed in violation of

Federal regulations.

From the time of initiai

occupancy until September, 1983,

Arrowhead rented no more than 40

apartments to eligible low income

tenants.

On August 26, 1983, IHDA and

Arrowhead changed the contracts, reducing

the available Section 8 allocation from

128 to 110 units. HUD approved the

change.

(3) Hawthorn Ridge Associates

Hawthorne Ridge Apartments

("Hawthorne"), located in DuPage County,

Illinois, is owned by defendant Hawthorn

Ridge Associates, an Illinois limited

partnership.

On December 11, 1975, and in

January, 1976, IHDA requested from HUD an

increase in the Section 8 subsidy

allocation of Hawthorn to 40% of the

dwelling units at that development (70

units). IHDA stated in part on January

7th:

This change is requested as a

result of our recent analysis of

the economic impact of market

rate rents for new construction

in light of present and projected

recession and inflation trends.

In our opinion, only a‘small

minority of the families in the

Village of Woodridge are able to

afford dwelling units which are

not 100% subsidized.

On December 23, 1975, HUD

approved the IHDA proposal for Hawthorn.

Irn December, 1975, HUD and IHFA signed an

ACC for the purpose of making Section 8

subsidies available for 76 units at

Hawthorn through execution of a HAP

contract with the owner. In December,

1975, IHDA and Hawthorn Ridge Associates

signed, and HUD subsequently approved, an

agreement. On April 25, 1977, IHDA and

Hawthorn Ridge Associates signed a HAP

contract approved by HUD in May 1977,

providing that:

The Contract units [§8 units] are

to be leased by the owner to

eligible lower-income families

("Families") for use and

occupancy by such families solely

as private dewellings"... The HFA

(IHDA) hereby agrees to make

housing assistance payments on

behalf of families for the

contract units to enable such

families to lease Decent, Safe

and Sanitary Housing pursuant to

Section 8 of the Act.

From the time of initial

occupancy to September 1983, Hawthorn

rented no more than approximately 35

apartments to eligible low income

tenants. On August 26, 1983, with HUD

approval, IHDA and Hawthorn Ridge

Associates changed the contracts,

reducing the available Section 8

ahtocation from 70 to 52 Section 8 units.

(4) Vernon Hills Associates II

Pebbleshire II, located in Cook

County is owned by defendant Vernon Hills

Associates II, an Illinois limited

partnership. On January 7, 1976, IHDA

S45

—

oe ee oe

requested from HUD an increase in the

Section 8 subsidy allocation at

Pebbleshire II to 40% of the swelling

units at that development (58 units).

IHDA supported its request with the

statement quoted at page 179 of this

opinion.

On September 20, 1976, HUD

approved the IHDA proposal for

Pebbleshire II. In July and September,

1976, HUD and IHDA signed an ACC for the

purpose of making Section 8 subsidies

available at Pebbleshire II through

execution of a HAP contract with the

owner. On September 22, 1976, IHDA and

Vernon Hills Associates II signed, and

HUD subsequently approved an agreement.

On December 30, 1977, IHDA and Vernon

Hills Associates II signed a HAP

contract, approved by HUD on March 10,

1978 providing in part that:

The Contract Units [58 units] are

to be leased by the owner to

eligible low-income families for

use and occupancy. by such

families as private dwellings...

The HFA [IHDA] hereby agrees to

make housing assistance payments

on behalf of families for the

contract units to enable such

families to lease Decent, Safe

and Sanitary Housing pursuant to

Section 8 of the Act.

From the time of initial

occupancy until September, 1983,

Pebbleshire II rented no more than 29

apartments to eligible low income

tenants. On August 26, 1983, IHDA and

Vernon Hills Associates II changed the

contracts, with HUD approval, reducing

the available Section 8 allocation from

58 to 40 Section 8 units.

(5) Prairiebrook Venture

Prairiebrook, located in Lake

County, is owned by Defendant

Prairiebrook Venture, an Illinois limited

partnership. On October 30, 1975, HUD

fhe) «me, «See She Se ie ee ee ee leet leet lt lee

approved the Prairiebrook proposal to

provide 320 units of housing, of which

128 units were to be subject to contract

for Section 8 subsidies on behalf of

lower income families. IHDA certified,

according to federal regulations, that

the authority had found a need for

housing assistance for the number and

size of the units applied in the subject

development based upon its approved

housing needs study.

On October 31, 1975, HUD and IHDA

Signed an ACC for the purpose of making

Section 8 subsidies available at

Prairiebrook through execution of a HAP

contract with the owner. In September

and October 1975, IHDA and Prairiebrook

Venture signed, and HUD subsequently

approved an agreement. In 1977, IHDA and

Prairiebrook Venture signed a HAP

contract approved by HUD in May, 1977,

‘ providing in part that:

The Contract Units [§8 Units] are

to be leased by the owner to

eligible low-income families for

use and occupancy by such

families as private dwellings...

The BFA [IHDA] hereby agrees to

make housing assistance payments

on behalf of families for the

contract units to enable such

families to lease Decent, Safe

and Sanitary Housing pursuant to

Section 8 of the Act.

Froin the time of initial

occupancy until September, 1983,

Prairiebrook rented no more than 64 units

to eligible low-income tenants. On

August 26, 1983, IHDA and Prairiebrook

a_i ot oe ee ee eel ee lee! eel

Venture changed the contracts, reducing

the available Section 8 allocation from

128 to 110 units. HUD approved this

change. |

(6) Grandwood Gardens Associates

Grand Oaks, located in Lake .

County, is owned by defendant Grandwood

Gardens Associates, an Illinois limited

partnership. In 1976, IHDA requested

from HUD an increase in the Section 8

subsidy allocation at Grand Oaks to 40%

of the dwelling units at that development

(60 units). IHDA supported its request

by the identical representation quoted at

page 179 of this opinion. On March 5,

1976, HUD approved the IHDA proposal for

Grand Oaks “to provide 150 units of

housing of which 60 units are to be the

subject of a contract for the making of

housing assistance payments on behalf of

eligible lower-income families leasing

such units.”

In May and July 1976, HUD and

IHDA signed an ACC for the purpose of

making Section 8 subsidies available at

Grand Oaks through execution of a HAP

contract with the owner. On March 17,

1976, IHDA and Grandwood Gardens signed,

and HUD subsequently approved an

agreement. In March and May, 1976, IHDA

and Grandwood Gardens Associates signed a

HAP contract, approved by HUD in May,

1977, providing in part that:

The Contract Units [§8 Units] are

to be leased by the owner to

eligible low-income families for

use and occupancy by such

families as private dwellings...

The HFA [IHDA]) hereby agrees to

make housing assistance payments

on behalf of families for the

contract units to enable such

families to lease Decent, Safe

and Sanitary Housing pursuant to

Section 8 of the Act.

From the time of initial

occupancy until November 1, 1984, Grand

Oaks rented no more than 30 units to

eligible low-income tenants, except tor a

period in which it received permission

from IHDA to rent up to 36 units to

Section 8 families.

On October 9, 1980, in a letter

to IHDA, Amder Associates stated

regarding Grand Oaks:

"Thank you for recognizing the

occupancy problem existing at

Grand Oaks and for permitting us

to increase our subsidized

occupancy by six apartment. units.

We understand that this increase

is to be a temporary measure. It

is our intention to bring the

subsidized occupancy back to the

20% design allocation as

conditions permit."

By letters dated July 27, 1983

and July 28, 1983, IHDA, without any

detailed statement of its reasons,

requested that the Secretary transfer

Section 8 authorizations for a total of

ninety units from five of the involved

apartment complexes (18 from each

complex) in DuPage, Cook, and Lake

Counties to Grand Oaks in Lake County.

The effect of the proposal would have

been to make Grand Oak's a 100%

subsidized project and also to remove

units from DuPage and Cook Counties. The

July 27th IHDA letter states that the

reductions are proposed "to provide for

the needed increase [at Grand Oaks]."

The July 28th IHDA letter states that the

reductions in assisted units at the five

complexes are "contemplated if and only

if the recaptured funding is assigned" to

Grand Oaks.

Without any discussion, by letter

dated August 31, 1983, the Secretary

approved reductions of 18 units each in

the Section 8 authorizations of the five

apartment complexes, as requested by

IHDA. Also on August 31, 1983, Chicago

Area Nanagex Everett H. Rothschild wrote

to IHDA approving the increase in Section

8 units at Grand Oaks and explaining that

the increase was to be funded by the

decreases at the other complexes (this

approval was apparently not the final

word). By letters dated September 30,

1983, IHDA notified each of the

Developers, except Grandwood Garden

Associates, of the Secretary's approval,

enclosing the approved contract

amendments.

On September 15, 1983, the Lake ~4

County Department of Planning, Zoning and

Environmental Quality advised HUD that

the proposal to convert Grand Oaks to

100% Section 8 occupancy was

“unacceptable” and "inconsistent with

Lake County's Housing Assistance Plan."

The County also complained that the

project would become identified as a low

income dwelling which would be

inconsistent with the Section 8 program.

On December 29, 1983, IHDA wrote the

Secretary, urging approval of the Grand

Oaks proposal and stating "the re-

allocation strategy contemplated is

attractive to us for the reason that it

preserves the total number of subsidized

units." Although the record fails to

disclose any direct communication between

the Developers and the Secretary

regarding IHDA's proposal, IHDA's letter

of December 29th indicates that its

proposal is “an acceptable allocation

insofar as the owners are concerned."

On March 19, 1984, the Secretary

rejected the increase in the Section 8

authorization for Grand Oaks originating

from the reductions approved on August

31, 1983, and that recaptured Section 8

funds were required to be applied to

elderly or handicapped housing projects

under certain 1983 amendments to the

federal housing laws. The Secretary also

indicated that the August 3l, 1983,

reductions could be rescinded if certain

conditions at the five complexes

including full utilization of the reduced

level of assisted units and a promise

that the “additional” units would be

fully utilized) were satisfied.

In support of his actions, the

Secretary presents generalized arguments

as to the validity of regulations

delegating authority to seek reductions

in Section 8 units to state housing

agencies. 24 C.F.R. §883.27. The

secretary points out that under these

regulations state housing agencies have

discretion to seek such reductions,

subject to HUD approval. The Secretary

notes that state housing agencies develop

and finance “new construction" Section 8

projects. consequently, they possess the

expertise to properly allocate assisted

units and the incentive to see that state

funds expended to build these projects

are well spent (through maximum

utilization of federal Section 8 funds).

Although the Secretary attempts to

portray IHDA as the repository of

discretion in these matters, HUD does not

(and could not) simply "rubber stamp” all

IHDA proposals.

This Court need not decide

whether these generalized justifications

for the Secretary's reliance (at least in

the first instance) upon recommendations

by state housing agencies are or are not

reasonable, for in this specific agency

action they lend no support to the

Secretary's decision on this

administrative record. The Secretary

cannot profess his reliance upon IHDA's

expertise yet ignore the central purpose

of IHDA's proposal. In its letter of

December 29, 1983, IHDA Labetied the

result of the Secretary's decision to be

“perverse” and "unacceptable to the

Authority." This is not to say that the

Secretary must accept or reject IHDA

proposals en toto. But here the

Secretary eliminated ninety Section 8

assisted units froin the DuPage, Cook and

Lake Counties without any consideration

of the effect of such an action,

including the availability of low income

housing in those areas.

(13) IHDA's evaluation, upon

which the Secretary assertedly relied,

considered at most the effect of a

transfer of these units from five

complexes with o subsidized/market rate

unit mix of roughly 40%/60% to a complex

that would become a 100% subsidized

housing project. IHDA contemplated

transfer rather than a reduction. Hence

IHDA's effort, (none of which have been

made a part of the record), along with

any evaluation performed by HUD's Chicago

office during the month in which the

reductions were pending prior to

approval, assuming any were made (no such

evaluations have been made a part of the

record in this action), didnot address

the elimination of ninety assisted units

from the market, which is the effect of

the Secretary's action.3 The Secretary's

3Although the Secretary did indicate

that the units eliminated could be

restored, the showing of full utilization

and additional demand required for

restoration decidedly alters to status

quo ante. Prior to the reductions, no

such showing was required to maintain

existing authorization levels and the

complexes had not fully utilized all

authorized Section 8 subsidized units.

Further, IHDA chose to transfer the

utilized units rather than push for an

increase in utilization at the five

apartment complexes. The Secretary's

decision has deprived IHDA of its

alternative option of vigorous contract

enforcement, and indeed, of any choice in

the matter. On June 14, 1985, the

plaintiffs requested (and were

subsequently given) leave to file as an

additional exhibit HUD Transmittal No.

4350.3 Chg-l, issued 3/7/85 (the

“Handbook") as an interpretation by the

Secretary of the governing statutes and

——E

regulations. See Burroughs v. Hills, 41

F.2d 1525, 1529 (7th Cir.1984) (HUD

Handbook is without binding force on

court but is entitled to notice as an

official interpretation of statutes or

regulations with which it is not in

conflict). A portion of this Handbook

addresses the conditions upon which an

apartment complex owner may lease

apartments allocated under ACC and HAP

contracts for Section 8 recipients to

persons ineligible for Section 8

assistance (i.e., the extent of

permissable underutilization). The Court

does not rely upon this document for its

holding, although it arguably provides

yet another articulation of agency

enforcement policy which is inconsistent

with the Secretary's challenged actions.

However, the Court notes that the

Secretary's attempts to explain away the

Handbook provisions are notably

unpersuasive (e.g. "provision stating

that owners may rent “up to' 20% to their

contract units to ineligibles does not

mean that these owners cannot rent more

than 20% to ineligibles (as that is

merely the point at which the state

housing agency may initiate sanctions);

“the Handbook was never meant to suggest

such a reading...‘and) the Handbook will

be revised to clarify this matter.”

Although Section 8 was fledgling program

with an uncertain future when the

developers signed the contracts at issue

here by the time the Secretary made the

challenged reductions. Section 8 had

become a successful and established

failure to consider this "relevant fact"

alone requires that his action be vacated

and remanded.

In a report by the Comptroller

General of the United States to Congress

dated April 27, 1981 entitled "Lenient

Rules Abet The Occupancy Of Low Income

Housing By Ineligible Tenants," cites

Chicago as an area with chronic problems

of underutilization at “partially

assisted" projects such as those involved

here. In his report, the Comptroller

stated:

The occupancy of section 8

housing by ineligible households

is a significant and costly

problem. Although program rules

allow some leeway for owners to

rent units under Section 8

assistance contracts to

program. accordingly, the logic of the

Secretary's argument that he is bound to

exercise his discretion as to contracts

signed in the mid-1970's differently than

those signed after 1981 is not self-

evident.

households ineligible to receive

assistance, the rules are too

lenient and some owners ignore

them. Although ineligible

tenants receive no direct

subsidies, they do benefit from

large, indirect financial

subsidies and displace needy

households.

In response to the investigation

conducted by the Comptroller, the

Secretary described the options available

to him when owners fail to rent to

eligible low-income tenants and

underutilize the set aside units. Ina

letter to the General Accounting Office

("GAO"), dated October 22, 1980, Appendix

VII to the April 27, 1981 Report the

Secretary stated as follows:

The new Section 8 Housing

Assistance Payments (HAP)

Contract has expanded the tools

HUD may use to enforce owners

compliance with the limitation on

admission of market rate tenants.

The owner's failure to comply

with this limitation is

considered a default under the

Contract. The options available

to HUD (and the contract

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administrator) upon owner default

include:

-reduction or suspension of

housing assistance payments to

the owner;

-denial of owner/agent

participation in HUD programs

until compliance is achieved,

pursuant to the 2530 clearance

process or temporary denial;

-reduction of the number of units

under the Contract; and

-HUD assumption of control of

project operations, including

rent collection and payment of

necessary expenses, through

appointment of a receiver or

obtainment of mortgagee-in-

possession status.

While all these remedies are

available, the most effective

seems to be the reduction of

suspension of assistance payments

until the owner complies with the

terms of the Contract. HUD

assumption of control would be

used only in the most extreme

cases, where an owner has

consistently and deliberately

violated the terms of the

Contract. The least attractive

remedy is reduction of the number

of units under the Contract since

this may be what an owner is

trying to achieve. However, this

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may be a remedy of last resort.

(emphasis added).

The problem of how to provide and

allocate scarce low-cost housing to low-

income persons is one that challenges

legislatures, governmental agencies,

urban planners and developers. It is

essential that decisions in this area by

government officials be clear and

consistent with announced policy. This

is especially important with respect to

using decisions because of the limited

scope of judicial review and relief

available to persons aggrieved, such as

the plaintiffs in this action. Without

explanation, or other attempts to secure

the Developers’ compliance, the Secretary

implemented the “least attractive”

"remedy of last resort" which he realized

would operate to reward project owners

for their past efforts to evade the

™

obligations under the HAP contracts.

Further, although Congress had chosen not

to apply the 1981 full utilization policy

retroactively, it had clearly |

demonstrated its preference for such a

policy. In light of the admonitions of

the GAO, the Secretary's own response and

the spirit of the 1981 amendments to

Section 8, it was incumbent on the

Secretary to consider carefully action

which rewarded past underutilization and

explain fully his reasons for approving

the reductions.

Since the Secretary's decision

was Clearly not based on considerations

of all relevant factors, including the

Secretary's own policy and regulations

and the prior administrative record which

set forth the history of increased

allocations and underutilization at each

complex, the decisions to reduce

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subsidized units and to eliminate

eligible units must be vacated, set aside

and remanded for reconsideration.

IT IS THEREFORE ORDERED that:

(1) The non-federal defendants'

motion for summary judgment is granted.

Judgment will enter on Counts I and II

against the plaintiffs and in favor of

James Kiley, A.D. Van Meter and the

defendant Developers.

(2) Count IV of the fourth

amended complaint is dismissed without

prejudice.

(3) The Secretary's motion for

summary judgment is granted in part and

denied in part. Judgment will enter in

favor of the Secretary and against the

plaintiffs on Count I of the fourth

amended complaint and that portion of

Count III directed to the Secretary's

enforcement policies.

(4) The plaintiffs' motion for

Summary judgment is granted in part and

denied in part. The Secretary's decision

as expressed in letters of August 31,

1983 and March 19, 1984, is vacated and

remanded to the Secretary for further

consideration.

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

AUDREY PRICE, et al.,

Plaintiffs,

SAMUEL PIERCE, et al.,

)

Vs. ) No. 83 c 6291

)

Defendants. )

FINAL JUDGMENT

The plaintiffs filed their

Complaint on September 8, 1983 and the

plaintiffs' class was certified on April

14, 1984. Various interlocutory rulings

were made during the actions.

On June 25, 1985, an order and a

written opinion was issued herein upon

the parties' cross Motions for Summary

Judgment. Price, et al., v. Pierce, et

al., 615 F. Supp. 173 (N.D. Ill. 1985).

The June 25, 1985 order denied plaintiffs

relief on all claims, except a portion of

the Administrative procedure Act ("APA")

claim against HUD. HUD's approval of

IHDA's request for reduction of Section 8

contract units at the defendant complexes

was declared unlawful, vacated, set aside

and remanded for further consideration.

In July, 1985 the plaintiffs

filed Notice of Appeal. Thereafter,

defendants Kiley and Van Meter filed a

Motion to Dismiss the appeal, arguing the

June 25, 1985 decision was not a final,

appealable order. On October 2, 1985,

the Seventh Circuit Court of Appeals

dismissed the plaintiffs' appeal stating

that the district court's June 25, 1985

decision "clearly contemplated further

action on the part of the Secretary."

Thereafter, on November 1, 1985,

HUD issued a subsequent decision in which

it stated in part:

On remand HUD has reconsidered

IHDA's requested subsidy

reduction and transfer, and has

concluded that since the transfer

cannot be approved, the reduction

]

request is necessarily mooted and

unapprovable. HUD will

accordingly take the appropriate

ministerial steps to reflect the

District Court's vacation of the

August, 1983 subsidy reductions

of each of the involved projects

to the level that existed before

IHDA's requests of June and July

1983.

On November 22, 1985, the

plaintiffs moved for entry of another

judgment herein. The plaintiffs' motion

was denied without prejudice on November

22, 1985.

On December 27, 1985, the

plaintiffs filed a Notice of Appeal. On

February 24, 1986, the Seventh Circuit

Court of Appeals dismissed the

plaintiffs' appeal, stating as follows:

"Thus, we have no appellate jurisdiction

over this case until the district court

reopens its file and enters final

judgment, which it retains jurisdiction

to do."

On March 24, 1986, the plaintiffs

moved the court to reopen the proceedings

and enter a final judgment which motion

is hereby granted.

Pursuant to this court's previous

rulings, the plaintiffs were denied

relief on all claims for damages and

claims seeking declaratory and injunctive

relief regarding the defendants' failure

to utilize one-half of the available

Section 8 units under contract between

HUD, IHDA and the apartment complexes and

no further action is pending with respect

to any of the plaintiffs' claim herein.

The parties represent that there has been

no change in the facts or law which merit

further consideration of the case.

The Court concludes and finds

that all issues raised in this action

have been addressed; that no further

claims are pending before this Court; and

—

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that the apartment complexes have been

restored to Section 8 contract levels

which existed before the unlawful

transfer in August and September, 1983.

Therefore, in accordance with

this Court's June 25, 1985 Memorandum

Opinion and Order and the findings and

conclusions stated herein, If IS ORDERED

that:

(1) Judgment is entered on

Counts I and II of the fourth amended

complaint against plaintiffs and in favor

of James Kiley, A.D. Van Meter and the

defendant developers.

(2) Count IV of the fourth

amended complaint is dismissed without

prejudice.

(3) Judgment is entered in favor

of the Secretary and against the

plaintiffs on Count I of the fourth

amended complaint and that portion of

Count III directed to the Secretary's

enforcement policies.

(4) That portion of plaintiffs'

claim in Count III challenging the

Secretary's decision as expressed in

letters of August 31, 1983 and March 19,

1984 is moot inasmuch as the relief

sought has been granted by the Secretary.

ENTER:

William T. Hart

UNITED STATES DISTRICT JUDGE

Dated: April 4, 1986

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42 U.S.C. §1437£. Lower-income housing

assistance

Authorization for assistance payments

(a) For the purpose of aiding

lower-income families in obtaining a

decent place to live and of promoting

economically mixed housing, assistance

payments may be made with respect to

existing, newly constructed, and

substantially rehabilitated housing in

accordance with the provisions of this

section.

Authorization for contracts for

assistance payments

(b)(1) The Secretary is authorized to

enter into annual contributions contracts

with public housing agencies pursuant to

which such agencies may enter into

contracts to make assistance payments to

owners of existing dwelling units in

accordance with this section. In areas

where no public housing agency has been

organized or where the Secretary

determines that a public housing agency

is unable to implement the provisions of

this section the Secretary is authorized

to enter into such contracts and to

perform the other functions assigned to a

public housing agency by this section.

(2) To the extent of annual

contributions authorizations under

section 1437c(c) of this title, the

Secretary is authorized to make

assistance payments pursuant to contracts

with owners or prospective owners who

agree to construct or substantially

rehabilitate housing in which some or all

of the units shall be available for

occupancy by lower-income families in

accordance with the provisions of this

section. The Secretary may also enter

into annual contributions contracts with

public housing agencies pursuant to which

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such agencies may enter into contracts to

make assistance payments to such owners

Or prospective owners.

5 U.S.C. $706. Scope of review

To the extent necessary to

decision and when presented, the

reviewing court shall decide all relevant

questions of law, interpret

constitutional and statutory provisions,

and determine the meaning or

applicability of the terms of an agency

action. The reviewing court shall--

- ’ ' '

——— ——E | — os u—_—*

(1) compel agency action

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unlawfully withheld or unreasonably

delayed; and

(2) hold unlawful and set aside

agency action, findings, and conclusions

found to be--

(A) arbitrary, capricious, an

abuse of discretion, or otherwise not in

accordance with law;

(B) contrary to constitutional

right, power, privilege, or immunity;

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jurisdiction, authority, or limitations,

or short of statutory right;

(D) without observance of

procedure required by law;

(E) unsupported by substantial

evidence in a case subject to sections

556 and 557 of this title or otherwise

reviewed on the record of an agency

hearing provided by statute; or

(F) unwarranted by the facts to the

extent that the facts are subject to

trial de novo by the reviewing court.

in making the foregoing determinations,

the court shall review the whole record

or those parts of it cited by a party,

and due account shall be taken of the

rule of prejudicial error.

42 U.S.C. §1983. Civil action for

deprivation of rights

Every person who, under color of

any statute, ordinance, regulation,

custom, or usage, of any State or

Territory or the District of Columbia,

subjects, or causes to be subtected, any

citizen of the United States or other

person within the jurisdiction thereof to

the deprivation of any rights,

privileges, or immunities secured by the

Constitution and laws, shall be liable to

the party injured in an action at law,

Suit in equity, or other proper

proceeding for redress. For the purposes

of this section, any Act of Congress

applicable exclusively to the District of

Columbia shall be considered to be a

statute of the District of Columbia.

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———_

——

24 C.F.R. §883.101 Purpose

Various States have established

statewide housing finance or development

agencies to encourage the provision of

housing for low and moderate income

persons and families. To enable these

agencies to effectively develop programs

to meet housing needs within their

respective jurisdictions, set-asides

under the Housing Assistance Payments

Program may be provided under the

provisions of this Subpart. Some of

these agencies also finance the

construction and rehabilitation of

housing and assume the risks of default

and foreclosure on developments they

finance. To allow these agencies

flexibility in developing programs to

meet housing needs, special policies and

procedures are provided.

need for housing assistance for the

number and size of units applied for; and

(d) The proposed project

co’ plements the allocation program of the

HUD field office.

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24 C.F.R. §883.327 Reduction of number

of contract units for failure to lease to

eligible families

(a) If at any time, beginning six

months after the effective date of-the

Contract, the Owner fails for a

continuous period of six months to have

at least 80% of the Contract Units leased

or available for leasing by Eligible

Families, the HFA, with the approval of

HUD, may on 30 days notice reduce the

number of Contract units to not less than

the number of units under lease or

available for leasing by Eligible

Families, plus 10% of such number if the

number is 10 or more, rounded to the next

highest number.

(b) At the end of the initial

term of the Contract and of each renewal

term, the HFA, with the approval of HUD,

may, by notice to the Owner, reduce the

number of Contract units to not less than

(1) the number of units under lease or

available for leasing by Eligible

Families at that time, or (2) the average

number of units so leased or available

for leasing during the last year,

whichever is the greater number, plus 10%

of such number, if the number is 10 or

more, rounded to the next highest number.

amendment of the ACC to provide for

subsequent restoration of any reduction

made pursuant to paragraphs (a) or (b) of

this section if HUD determines that the

restoration is justified as a result of

changes in demand and in the light of the

Owner's record of compliance with his

obligations under the Contract and if

annual contributions contract authority

is available; and HUD will take such

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steps authorized by section 8(c)(6) of

the Act as may be necessary to carry out

this assurance (see §883.203).

24 C.F.R. §883.328 HUD review of

contract compliance

HUD will review project

operations at such intervals as it deems

necessary to ensure that the Owner-is in

full compliance with the terms and

conditions of the Contract. Equal

Opportunity review may be conducted with

the scheduled HUD review or at any time

deemed appropriate by HUD.

UNITED STATES GENERAL ACCOUNTING OFFICE

Washington, D.C. 20548

The Honorable Lawrence B. Simons

Assistant Secretary for Housing-

Federal Housing Commissioner

Department of Housing and

Urban Development

August 21, 1980

Dear Mr. Simons:

In our current review of the

cost-effectiveness of Section 8 partially

assisted projects we have observed a

problem that we believe warrants your

-attention. This is the practice of some

Section 8 project owners who are leasing

units, for which Section 8 assistance is

available, to market rate tenants rather

then Section 8 eligible households. The

problem affects both partially and fully

assisted projects. Although leasing to

such ineligible market rate households is

permissible under the Section 8

regulations, we believe the current

~ policy and procedures relating to their

inclusion in assisted housing could be

improved. As you know the Department

of Housing and Urban Development recently

(1) lowered to 10% the percentage of

"assisted units" in any project which can

be rented to households who are

ineligible for Section 8, and (2)

developed new sanctions for dealing with

project owners who fail to comply with

the 10% limitation. We agree with these

changes, but feel that some additional

measures are needed.

Since HUD is currently making

revisions to certain of the regulations

applicable to Section 8 and rewriting the

Section 8 contract forms, we believe you

should consider,

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(1) further lowering the

percentage limitation on

ineligible households to 5%,

with no exception for

partially assisted projects,

(2) issuing explicit enforcement

guidelines for use by HUD

area offices in dealing with

project owners who exceed the

limitation on ineligible

households and

(3) making the new percentage

limitation on ineligibles

applicable to completed

projects for which the

earlier 20% limitation is

still in affect.

Our limited data collection

indicates a significant number of

projects in which ineligible households

meet or exceed the current applicable

limits on occupancy by ineligibles. But

regardless of how widespread or how

limited the problem may be at present, we

believe our findings warrant your

attention because of the potential for

greater occupancy by ineligible

households in the future, and what may be

a growing trend in some areas toward

partially assisted projects, to which

market rate tenants are much easier to

attract.

We are therefore raising this

issue now so that HUD can take action as

early as possible and so that we can get

your reaction before performing

additional field work to establish the

extent of the problem nationwide. A

detailed explanation of our reasoning and

further discussion of our views follows.

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TWO OBJECTIONS TO THE POLICY

OF LEASING TO INELIGIBLE HOUSEHOLDS

Objections to the exception

allowing ineligible households to occupy

Section 8 can be made on at least two

grounds. First, occupancy of Section 8

contracted units by ineligible tenants

probably frustrates the intent of the

program by causing the program to fall

short of its assistance goals, even

though the money to achieve more has been

made available by Congress. Second, the

cost-effectiveness of the program is

degraded since indirect subsidy costs

which are incurred regardless of who

occupies the housing units, must Dde

counted against a lower number of

assisted households.

THE IMPACT OF ALLOWING INELIGIBLE

HOUSEHOLDS TO OCCUPY SECTION 8 UNITS

In order to assess the impact of

the policy allowing ineligible households

we looked at data on occupancy provided

by three HUD area offices. In the Los

Angeles area office the data was taken

from the Management Information Systein

and included a significant number of

projects for which no data were recorded.

We decided that information from that

office was inconclusive. In the other

two area offices, Chicago and Detroit, we

estimate that at least 1000 units and 400

units, respectively, were occupied by

households ineligible for Section 8.

In Chicago, 86% of all uninsured

Section 8 units were housing eligible

Section 8 households. Allowing for 3%

vacancies among contracted units we can

conclude that about 11% (or 950 units) of

=a ace

—_.

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the roughly 8900 new or substantially

rehabilitated units for which Section 8

assistance is available are leased to

ineligible households. This overall

statistic is made up of projects

exhibiting a wide range of variation in

the percentage of assisted units occupied

by eligible households. (See Table 4).

One small project has had only 1 assisted

household during several years of

operation and presently houses no

eligible tenants. Another project

approved for occupancy by 164 assisted

households has never exceeded 50 Section

8 eligible households. Several partially

assisted projects have consistently

rented roughly half of the number of

units planned for assisted households to

market rate households.

One partially assisted project

which seemed to be limiting the number of

assisted households to about half of

those authorized had an extremely high

Overall vacancy rate of nearly 17%.

These vacancies could have been

eliminated if all units under HAP

contract were leased to assisted

households. Several of these partially

assisted projects, which underuse the

available Section 8 assistance are in the

City of Chicago which has among the

longest Section 8 and public housing

waiting lists in the nation. (See Table

6). Other uninsured projects housed only

eligible Section 8 households. The

limited number of FHA insured projects in

Chicago which are in operation are

generally fully assisted and house only

eligible tenants.

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In the Detroit area office we

obtained data on uninsured projects only,

since it was more readily available and

we were told that the FHA insured

projects would generally follow the

pattern noted in Chicago. Seven percent

of all uninsured units covered by Section

8 assistance contracts monitored by the

Detroit area office house unassisted

housenolds. At the end of June there

were 6987 assisted units under lease of

which 6563 were leased to eligible

households, leaving 424 units leased to

market rate households. (See Table 5 for

examples of particular projects.)

In both area offices, a large

number of units which could have served

assisted households went to households

who were never envisioned as Section 8

recipients. Meanwhile, the funds to

subsidize at least 1400 households went

unused.

THE ISSUE OF ECONOMIC INTEGRATION

Our argument that the production

goals of the program are frustrated by

ineligible occupancy is not inconsistent

with another stated prograin goal--

economic integration. This is because

economic integration is to be served by

developing partially assisted projects

and by favoring locations which provide a

deconcentration of low income households.

Once HAP contracts are signed, the number

and location of assisted units have been

fixed. Economic integration among the

assisted units should be achieved by

selection tenants across the “eligible"

income spectrum. The regulations even

allow for the inclusion of households

whose incomes are initially low enough to

qualify, but increase to the point where

they would no longer qualify. What we

are arguing against is the use of units

already ear marked for assisting low

income households to house middle income

households. For example, if a partially

assisted project with 20% of its total

units designated as assisted, fails to

achieve this 20% assisted occupancy, the

goal of economic integration is damaged

Since fewer households than planned, are

housed in the integrated environment. On

the other hand a fully assisted project

which has, say, 15% of its units leased

to market rate households still has a

high concentration of low income

families.

Project owners wishing to develop

a more viable tenant population by

attracting a wide income range among a

projects residents, can do so within the

eligible Section 8 population.

Eligibility currently ranges up to 80% of

area median income for a family of four,

while the average income of Section 8

households is much lower, with the bulk

of eligible households nationwide being

below the poverty threshold.

THE COST OF THE POLICY

The potential cost of allowing

ineligible households to occupy Section 8

contracted units is quite large. This is

because the indirect subsidy costs for

the unutilized units, such as HUD

administrative costs, the GNMA TANDEM

discounts and tax expenditures (where tax

exempt bonds are used), are incurred on

behalf of ineligible households. These

are in effect the hidden costs of

providing assisted housing and when they

are added to the direct subsidies for

assisted units the total subsidy per

assisted unit is substantially higher

than if all assisted units serve eligible

households. This higher cost is

illustrated by the calculations in Table

1, which show the possible consequences

of leasing 10% and 20% of contracted

units to ineligible households. The

calculations are based upon an FHA

financed project where GNMA purchases the

mortgage and sells it at a discount. We

estimate that allowing 10% of such units

to be leased to ineligible households

increases the subsidy to assisted

households by $820 for 20 years of

Operation. If this additional expense

were incurred to subsidize 500,000 units

the additional cost occasioned by

allowing ineligible households to occupy

Section 8 units would be $410 million.

Another way of viewing the cost

of the new 10% allowance for ineligible

households is that for every 100,000

units financed under the new regulations

with FHA TANDEM loans, 10,000 units (10%)

will receive large per unit TANDEM

subsidies, yet need never house

Subsidized tenants. Using the TANDEM

Subsidy cost figures shown in the

Footnotes to Table 1, we calculate a

potential expenditure of $60,000,000

without any prograin benefits. This

amount of money if applied directly to

the purchase of multifamily housing could

provide 2,000 dwelling units at $34,000

per unit. Although these illustrations

are based on FHA financing, certain

indirect costs would be incurred under

any Section 8 financing mechanism, and in

those involving tax exempt mortgage

bonds, the potential costs of

misutilizing units would be even greater.

Both these cost calculations

assume that all units subject to the

100

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—

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— |

exemption for ineligible households would

actually house market rate tenants. This

is very likely unrealistic, yet with a

tight rental market throughout major

portions of the U.S. and no relief in

sight, the pressure for an increase in

market rate tenant occupancy is probably

quite strong. The cost estimates also

show only one of the major subsidies

which can be increased when units do not

serve the intended beneficiaries and are

based upon unit costs which are much

lower than those we can expect to

experience in the future.

THE PERCENTAGE OF ALLOWABLE INELIGIBLE

HOUSEHOLDS COULD BE REDUCED

The exception for ineligible

households could be further reduced from

10% to 5% for fully assisted Section 8

projects and eliminated altogether for

projects where fewer than half of the

101

total units in the development are under

Section 8 contracts. This would result

in greater availability to needy tenants

while reducing the total subsidy cost per

household assisted.

Our understanding of the 10%

exception is that it provides leeway to

avoid unnecessary administrative problems

in granting case-by-case exceptions any

time a unit was leased to an ineligible

tenant for unavoidable reasons. For

example, a tenant might, after a period

of time, go over income yet wish to

remain, which the program allows.

We believe a 5% limit would allow

this for even the smallest projects while

insuring that if it happens repeatedly,

the project owner would have to notify

HUD and ask for permission.

For partially assisted projects

where the owner already may have

102

significant leeway in choosing market

rate versus assisted households each time

a vacancy arises, we see no need for the

exception. We noted in our limited data

collection that for projects with less a

than half of the units under Section 8

assistance contracts, there seemed to be

a greater likelihood that market rate

tenants would occupy units for which

assistance was available.

ENFORCEMENT GUIDELINES ARE NEEDED

With the adoption of the new

regulations which were effective in

November 1979, HUD now has a number of

explicit sanctions for dealing with

landlords who lease more than 10% of

their assisted units to ineligible

households. HUD may sue for specific

performance of contract terms, suspend or

Gebar the number of units under Section 8

contracts. It would therefore seem to be

103

an opportune time to issue clear

guidelines to regional and area office

personnel, spelling out acceptable limits

within which they should expect project

Owners to comply, time periods for coming

into compliance and a set of procedures

which should be followed in enforcing

compliance when necessary. To our

Knowledge no such guidelines exist even

though the past HAP contracts probably

provided sufficient authority for HUD to

take a variety of actions against non-

complying project owners, in addition to

the reduction in contract units spelled

out in the old regulations. Several

field office personnel we spoke with felt

this reduction in units was their only

recourse and were reluctant to use this

Sanction at any rate. We agree with this

view since reducing the contract units

104

has the effect of making permanent the

loss of subsidized units.

To make sure that this reluctance

to enforce the limitation on ineligible

households does not persist in the

future, we believe an explicit policy

statement and specific guidelines on

enforcement would be very effective.

Better enforcement would be particularly

important if our limited research, which

showed that a minority of the projects

accounted for most of the ineligible

tenants, proves true in other areas of

the country.

RETROACTIVITY TO PAST SECTION 8

CONTRACTS SHOULD BE EXPLORED

We believe that HUD should

carefully explore the possibility of

making the lower limitation on ineligible

households retroactive to past Section 8

development. This should be done now

105

even if further investigation indicates

that it does not appear to be a

nationwide problem.

By the end of 1979, more than

9000 Section 8 projects, with in excess

of 425,000 assisted units, had been

Started under the new construction and

substantial rehabilitation portions of

the program. Nearly all these units are

covered by the earlier regulations

allowing up to 20% of all contracted

Section 8 units to be leased to

ineligible tenants. Since all these

units included non-recoverable indirect

tax and financing related subsidies, the

bulk of the prograin has the potential of

being only 80% effective, but at much

higher subsidy costs per unit than

anticipated.

We do not have the statistics to

make an accurate estimate of the current

106

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rr dDdDdhlLe

nationwide situation since the Section 8

occupancy data is of uncertain and

varying quality and extensive field work

would be necessary. Nor can we predict

the extent to which Section 8 owners will

tend to admit ineligible (market rate)

households in the future. What is

certain is that the incentives to do so,

and the market forces which make it

possible will increase as the cost of

housing grows and the scarcity of quality

rental housing becomes more prevalent.

If this problem develops to the point

where :nany Section 8 owners come to rely

on ineligible households as a significant

part of their tenancy, then the political

difficulty of making a retroactive change

will increase proportionately.

Such a change is very likely

possible and practical since it passes

two sensible tests for a retroactive

107

policy adjustment. First, it would

buttress the original intent of the

program by maximizing the service of the

program to the intended beneficiaries.

Second, it would not cause any undue

hardship on Section 8 project owners who,

after all, contracted initially to house

Section 8 eligible households. The

change would merely reinforce the

government's consistent position that

assisted units should serve eligible

households--that is, the change is

reasonable given the purpose of the

Original assistance contract and the

favorable financing terms afforded

housing developers. Section 8 owners

would still have the adility to serve a

broad range of income eligible households

under current eligibility rules if their

motivation in admitting ineligible

108

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— |

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“a 2

households has been to provide economic

integration.

SUMMARY

Prograin changes to reduce the

impact of the exception for ineligible

households in Section 8 housing projects

could enhance the programs impact,

increase its service to needy households,

and reduce its per unit subsidy costs

while having no apparent adverse affect

on the owners and operators of Section 8

housing or the prograins intended

beneficiaries.

We hope that our thoughts on this

matter will prove useful and constructive

and would appreciate it if you would

advise us of actions you intend to take

in response to this problem. Should you

have any questions on this matter or the

contents of this report we would be glad

to discuss them with you or your staff.

109

If so, you can call me or Mr. William

Gaines, the team leader on this work, at

426-1645.

Sincerely yours,

Richard J. Woods

Associate Director

110

REPORT BY THE

COMPTROLLER GENERAL

OF THE UNITED STATES

LENIENT RULES ABET THE

OCCUPANCY OF LOW INCOME

HOUSING BY INELIGIBLE TENANTS

April 27, 1981

lll

The occupancy of Section 8 housing by

ineligible households is a significant

and costly problem. Although program

rules allow some leeway for owners to

rent units under Section 8 assistance

contracts to households ineligible to

receive assistance, the rules are too

lenient and some owners ignore them.

Although ineligible tenants receive no

direct subsidies, they do benefit from

large, indirect financing subsidies and

displace needy households.

The Departinent of Housing and

Urban Development has agreed to take a

number of corrective actions suggested

earlier by GAO, but some aspects of the

problem remain. GAO is therefore

recommending further actions by both the

Congress and the Departinent.

112

V== ae

‘

= = - = ‘

COMPTROLLER GENERAL OF THE UNITED STATES

WASHINGTON D.C. 20548

The Honorable Jake Garn

Chairman, Committee on Banking,

Housing and Urban Affairs

United States Senate

The Honorable Fernand J. St. Germain

Chairman, Committee on Banking,

Finance and Urban Affairs

House of Representatives

While reviewing the cost

effectiveness of Section 8 subsidized

rental housing we observed that some

Section 8 project owners lease units for

which Section 8 assistance is available

to tenants ineligible for rental

assistance. Although limited leasing to

ineligible or market-rate households is

permissible when no eligible households

are available and under certain other

113

conditions, we believe the current policy

and procedures related to including

ineligible tenants in assisted housing

could be strengthened.

The Department of Housing and

Urban Development (HUD) recently took a

number of positive steps when it (1)

lowered to 10 percent (from 20 percent)

the percentage of Section 8 assisted

units in any new project that can be

rented to ineligible households without

explicit HUD approval and (2) developed

new sanctions for dealing with project

owners who fail to comply with the

limitation. We agreed with these

changes, but believed additional measures

were needed, Since all previously

completed projects continue to be covered

by the older regulations and because

HUD's enforcement options were still

limited. Although HUD has promised to

114

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re vr Tee meee qaaeey —

make some further changes, the problem

remains unsolved. Therefore, we

recommend that the Secretary of Housing

and urban Development:

Modify program regulations for

new, fully assisted projects to

further lower the percentage

limitation, from 10 percent to 5

percent, on the number of units

that can be occupied by

ineligible households without HUD

approval and allow no ineligible

households in contracted units in

partially assisted projects

without HUD approval.

Issue explicit enforceinent

guidelines for use by HUD

regional and area offices in

dealing with project owners who

exceed the limitation on

ineligible households or

otherwise fail to comply with

HUD's policies on occupancy by

ineligible households.

Amend Section 8 regulations to

explicitly state a project

owner's responsibility to make

every effort to rent all Section

8 contracted units to eligible

households before utilizing the

exception for ineligible

households.

115

either:

In addition, we recommend that the

Congress consider whether a more

stringent limitation on ineligible

households should be applied to

previously completed Section 8 projects.

This limitation could be achieved by

enacting legislation to apply a 5

percent limitation to completed

projects already under contract

directing the Department to

change its regulations to have

the same effect.

Finally, we recommend that the Congress

enact legislation to

Clarify the program's original

intent--that housing units for

which Section 8 subsidy contracts

are signed by used to the maximum

extent possible for eligible

households.

Our data on all projects in HUD's

Los Angeles, California; Detroit,

Michigan; and Chicago, Illinois,

area offices indicates that in

many housing projects, the number

of ineligible households exceeds

the applicable limits on

116

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—

—E

occupancy by ineligible

households. This problem

warrants prompt attention because

(1) under present regulations the

potential exists for greater

occupancy by ineligible

households in the future and (2)

the incentives to house

ineligible households and market

forces that encourage it will

increase as the cost of housing

escalates and the scarcity of

rental housing becomes more

prevalent.

We brought this problem to HUD's

attention in Augustl at a time when the

agency was making changes to Section 8

regulations and contract forms. Although

HUD promised to make several positive

changes in occupancy and contract

administration guidelines in response to

our concerns, it argued against lowering

further the administrative limitation on

ineligible households and toox the

lLetter to the Assistant Secretary

for Housing - Federal Housing

Commissioner, dated August 21, 1980.

117

position that our suggestion to make such

limitations retroactive to Section 8

projects already in operation was legally

impossible. We concluded that the

retroactive change was possible and would

probably cause no real detriment to

owners, but that litigation could result.

Our analysis of HUD comments on

Our August letter is in Appendix VI, and

HUD's entire response is reproduced as

Appendix VII. HUD declined to comment on

the draft of this report because it felt

that its response to our August letter

was Still applicable and that it had

nothing to add at this time. HUD also

declined to comment on the congressional

recommendations, which were not included

in the August letter.

OBJECTIVE, SCOPE AND METHODOLOGY

In a previous review by us of

Section 8 housing, data gathered from

118

Peet moll pel pel el ee ee ee ee ee

—

——

HUD's Chicago area office suggested that

there might be a problem with ineligible

households occupying Section 8 units. To

determine the extent to which this

problem existed in other areas, we

selected the Chicago, Detroit, and Los

Angeles area offices for data collection

because of their large Section 8

portfolios. We did not include Los

Angeles in our final analysis for reasons

discussed later. (See p.5.) This review

was performed primarily at HUD

headquarters in Washington, D.C., with

field data collection accomplished by

telephone and mail.

Tenant occupancy data was

collected from Section 8 Reports on

Program Utilization (HUD form 52684),

which provided figures on the total

number of units in a project. These

statistics were compiled by HUD area

119

offices at our request, and using these

and other records, these offices also

provided independent estimates of the

number of ineligible (market-rate)

heuseholds in Section 8 contracted units.

We used these estimates as the basis for

our findings. These calculations

provided our starting point for assessing

how HUD's limitation on leasing assisted

units to ineligible households affected

the effectiveness of Section 8 and for

estimating the possible costs of various

levels of the problem.

Cost estimates are based on a

cost methodology developed in an earlier

GAO report? and recent data on loan

discounts absorbed by the Government

National Mortgage Association (GNMA). We

2"Evaluation of Alternatives for

Financing Low and Moderate Income Rental

Housing" (PAD-80-13, Sept. 30, 1980).

120

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examined pertinent HUD regulations,

contract forms, and handbooks and

discussed ineligible occupancy with HUD

program officials in Washington and each

of the area offices. We also did an

extensive legislative and legal analysis

that helped us in framing our

recommendations.

We did not attempt to measure the

nationwide problem; however, the

magnitude of the problem in Chicago and

Detroit, discussions with HUD officials

in other area offices, and a preliminary

review of ‘date on tenant occupancy in

several other area offices suggest that

this abuse of Section 8 contracted units

exists elsewhere.

TWO OBJECTIONS TO THE POLICY

OF LEASING TO INELIGIBLE HOUSEHOLDS

We have two objections to

allowing ineligible households to occupy

121

Section 8 units. First, occupancy of

Section 8 contracted units by ineligible

tenants probably frustrates the intent of

the program by causing it to fall short

of its planned assistance, even though

the money to achieve more assistance has

been made available by the Congress.

Second, the cost effectiveness of the

prograin is degraded since indirect

Sudsidy costs which are incurred--

regardless of who occupies the housing

units--must logically be counted against

a lower number of assisted households.

THE IMPACT OF ALLOWING INELIGIBLE

HOUSEHOLDS TO OCCUPY SECTION 8

To assess the impact of the

policy allowing occupancy by ineligible

households, we looked at occupancy data

provided py three HUD area offices.

Since two of these area offices showed

Significant numbers of ineligible

122

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ee)

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inna OZ

households, we suspended further costly

data collection.

In the Los Angeles area office,

data taken from the Management

Information System included a significant

number of projects for which no data was

recorded. We decided that information

from that office was inconclusive. In

the other two area offices (Chicago and

Detroit), we estimated that at least

1,000 units and 400 units, respectively,

were oceupied by households ineligible

for Section 8.

In the Chicago area office, 86%

of all Section 8 units not insured by the

Federal Housing Administration (FHA)

(most projects in operation are

uninsured) were housing eligible Section

8 households. Allowing for the 3%

vacancy factor that HUD gave us for

Chicago area contracted units, we

123

’

estimate that about 11% (or 950 units) of

the roughly 8,900 new or substantially

rehabilitated units for which Section 8

assistance is available are leased to

ineligible households. This overall

Statistic is made’ up of projects

exhibiting a wide variation in the

percentage of aseietes units occupied by

eligible households. One small project,

which has had only one assisted household

during several years of operation,

presently houses no eligible tenants.

Another project approved for occupancy by

164 assisted households has never

exceeded 50 Section 8 eligible office

projects showing the variation in the

extent to which projects include

ineligible households.

Several partially assisted

projects in the Chicago area have

consistently rented roughly half of the

124

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inmmmmemHHeREeEenme = =

number of units planned for assisted

households to market-rate households.

One project that seemed to be limiting

the number of assisted households to

about half of those authorized had an

extremely high overall vacancy rate of

nearly 17%. These vacancies, for which

HUD very likely continues to pay

subsidies, could have been eliminated if

all units under a Housing Assistance

Payments (HAPs) contract were leased to

assisted households. Several partially

assisted projects that are underusing the

available Section 8 assistance are in

Chicago, which has one of the longest

Section 8 and public housing waiting

lists in the nation. (See Appendix III.)

The limited number of FHA-insured

Section 8 projects in Chicago that are in

operation are generally fully assisted

and house only eligible tenants.

125

In the Detroit are office, we

obtained data on uninsured projects only,

Since it was more readily available and

we were told that the FHA-insured

projects would generally follow the

pattern noted in Chicago. 6% of all

uninsured units covered by Section 8

assistance contracts monitored by the

Detroit area office house ineligible

households. At the end of June, 6,987

assisted units were under lease, 6,563 of

which were leased to eligible households,

leaving 424 units leased to market-rate

households. (See Appendix II for

examples of particular projects.)

Although the 6% may not appear

detrimental to the Section 8 program, the

loss of these contracted units to market-

rate households is troublesome because we

know that there is a great need for

subsidized rental housing as evidenced by

126

a rr ee oT ae le co mee eee eee ee

the long Section 8 and public housing

waiting lists.

In the Detroit and Chicago areas,

a large nuinber of units that could have

served assisted households went to

households that were never envisioned as

Section 8 recipients. Meanwhile, the

funds to subsidize an equal number of

needy households went unused.

PROGRAM INTENT AND THE ISSUE

OF ECONOMIC INTEGRATION

Our argument that the program's

intent is frustrated by ineligible

occupancy is not inconsistent with

another stated program goal--economic

integration. In fact, we believe

ineligible occupancy also works against

or fails to enhance economic integration

in many instances. This is because the

program was designed to assure economic

integration by developing partially

127

assisted projects, by providing broad

eligibility requirements, and by favoring

locations that provide a deconcentration

of low-income households, not by renting

Section 8 units to higher income tenants.

Once HAP contracts are signed, the Aeaber

and location of assisted units should be

fixed.

Economic integration among

assisted units should be achieved by

selecting tenants across the broad range

of income-eligible households. The

regulations allow for the inclusion of

households whose incomes are initially

low enough to qualify, but increase to

the point where they would no longer

qualify. This can further enhance

economic integration. What we are

arguing against is the use of units

already earmarked for assisting lower

income households to house middle-income

128

households, without regard to the

availability of assisted households. For

example, if a partially assisted project

with 20% of its total units designated as

assisted (and 80% for market-rate

tenants) fails to achieve the 20%

assisted occupancy, the goal of economic

integration is actually damaged since

fewer assisted households than planned

are housed in the integrated environment.

It seems unlikely that this is the kind

of economically integrated environment

envisioned in the legislation.

Project owners wishing to develop

an economically diverse tenant population

by attracting a range of incomes among

residents in a project can do so within

the eligible Section 8 population.

Eligibility currently ranges up to 80% of

area median income for a family. In

Meecniity. the average income of Section

129

8 households is quite low, with the bulk

of tenant households nationwide falling

below the poverty threshold.

THE COST OF THE POLICY

The potential cost of allowing

ineligible households to occupy Section 8

contracted units is quite large. This is

because the indirect subsidy costs, such

as HUD adininistrative costs, loan

discounts absorbed by the Government

(known as TANDEM), and tax expenditures

(taxes foregone: when tax exempt bonds are

used) for units rented to ineligible

households are incurred without providing

any benefit to eligible households. 3

These are, in effect, the hidden costs of

providing assisted housing to eligible

program recipients, and when they are

added to the direct subsidies for

3See the footnotes for Appendix IV.

130

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assisted units, the total subsidy per

assisted unit is substantially higher

than if all assisted units serve eligible

households. This higher cost is

illustrated by the calculations in

Appendix IV, which show the possible

consequences of leasing 10% and 29% of

contracted units to ineligible

households, which is now possible for

projects already under contract. The

calculations are based upon an FHA-

financed project where GNMA purchases the

mortgage and sells it at a discount. We

estimate that the November 5 regulation

change allowing 10% of such units to be

leased to ineligible households could

conceivably increase the subsidy to

assisted households by $820 per unit for

20 years of operation. If this

additional expense was incurred to

subsidize 100,000 households, the

131

additional cost occasioned by allowing

ineligible households to occupy Section 8

units would be $82 million.

Another way of viewing the

potential cost of allowing a 10%

exception for ineligible households to

remain in force is that for every 100,000

units financed under the new regulation

with FHA TANDEM loans, 10,000 units (108)

will receive large, per-unit TANDEM

subsidies, yet may never benefit

households in need of housing assistance.

Using only the TANDEM subsidy cost

figures shown in the footnotes to

Appendix IV, we calculated a potential

expenditure of $68,000,000, and none of

these funds would provide housing to

eligible households. This amount of

money, if applied directly to the

purchase of multifamily housing, could

provide 2,000 dwelling units at $34,000

132

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per unit. Although these illustrations

are based on FHA TANDEM financing,

certain indirect costs would be incurred

under any Section 8 financing mechanism,

and in those involving tax exempt

mortgage bonds, the potential costs of

misusing units are even greater since the

indirect costs are much higher.

Both these cost calculations

assume that all units subject to the

exemption for ineligible households would

actually house market-rate tonne =

occupancy is probably quite strong. The

cost estimates are also understated since

they reflect only one of the major per-

unit indirect subsidies (TANDEM) and are

based upon unit development costs, which

are much lower than those we can expect

in the future.

133

THE PERCENTAGE OF ALLOWABLE INELIGIBLE

HOUSEHOLDS SHOULD BE REDUCED

We believe the exception for

ineligible households should be further

reduced from 10% to 5% for Section 8

projects where all ye are under

assistance contracts and eliminated

altogether for projects where fewer than

half of the total units are under Section

8 contracts. This change would result in

greater availability of units to needy

tenants while reducing the total subsidy

cost per household assisted.

Our understanding of the 10%

exception allowing some ineligible

tenants is that it was set arbitrarily to

avoid unnecessary administrative problems

in granting case-by-case exceptions any

time a unit is leased to an ineligible

tenant for unavoidable reasons. For

example, a tenant might, after a period

134

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HBHeeEnlnh &

of time, go over income yet wish to

remain in the project, which the program

allows. We believe a 5% limit’ would

give sufficient leeway for even the

smallest projects while ensuring that to

exceed the limitation, the project owner

would have to notify HUD and asx for

permission. HUD takes the position that

owners have the obligation to rent all

contracted units to assisted households

and the leeway to include market-rate

households applies only when owners find

it impossible to locate eligible tenants

or when an eligible tenant goes over

income. However, the actual wording of

4although we have no statistical

basis for selecting 5%, we feel that if

HUD does an adequate enforcement job,

which it has promised to do, the 5% limit

will essentially eliminate owner

noncompliance and eliminate ineligible

households except where ineligible

occupancy is unavoidable for reasons

already covered in HUD regulations.

135

the limitation in the regulation makes it

appear that owners can exceed the

limitation for up to 6 months before HUD

will take action to enforce owner

compliance.

ee ee

For partially assisted projects

4 ° ‘

where the owner already has 8Tdgnificant

leeway in choosing market-rate versus

assisted households each time a vacancy

arises, we see no need for the exception.

We noted in our data collection that for

projects that had less than half of the

units under Section 8 assistance

contracts and were therefore Clearly

partially assisted, there seemed to be a

greater likelihood that market-rate

tenants would occupy units for which

assistance was available. HUD felt that

this probably occurs because it

easier to attract higher income

feed eed Seed

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— ~y

136

- , , . . ‘ . * .

—— 1

—

to projects that have fewer low income

tenants.

HUD felt that the current 10%

limitation had not been in effect long

enough to judge its impact and suggested

delaying any further changes. We see no

reason for delaying the change and

discuss our reasons in Appendix VI

Recommendation to lower the exception for

ineligible households

To reduce the number of Section 8

assisted units that can be leased to

ineligible households, we recommend that:

the Secretary of Housing and

Urban Development further lower

the percentage limitation on

ineligible households from 10% to

5% for new, fully assisted

projects without HUD approval.

ENFORCEMENT GUIDELINES ARE NEEDED

With the adoption of the new

regulations, which were effective in

November 1979, HUD now has several

explicit sanctions for dealing with

landlords who lease more than 10% of

their assisted units to ineligible

households. HUD may reduce or suspend

assistance payments, sue for specific

performance of contract terms, suspend or

debar the owner from HUD progra:ns or, as

in the past, reduce the number of units

under Section 8 contracts. It would

therefore seem to be an opportune time to

issue clear guidelines to regional and

area office personnel spelling out (1)

acceptable limits within which they

Should expect project owners to comply,

(2) time periods for coming into

compliance, and (3) a set of procedures

that should be followed to enforce

compliance when necessary. To our

Knowledge, no such guidelines exist even

though the past HAP contracts probably

provided sufficient authority for HUD to

138

take a variety of actions against

noncomplying project owners, in addition

to the reduction in contract units

spelled out in the old regulations.

Several field office personnel we spoke

with felt that this reduction in units

was their only recourse and thus were

reluctant to use this sanction and

further hamper the achievement of the

Section 8 planned assistance goals. We

agree with this view since reducing the

contract units has the effect of making

permanent the loss of subsidized units.

To make sure that this reluctance

to enforce the limitation on ineligible

households does aot continue, we believe

specific guidelines on enforcement for

use by area offices are needed. Better

enforcement would be particularly

important if our limited research, which

showed that a minority of projects

139

accounted for much of the problem, proves

true in other areas of the country.

HUD promised to take a number of

steps aimed at better enforcement, which

are discussed in detail in Appendix VI.

Recommendation it issue specific

enforcement guidelines

To provide HUD regional and area

office personnel with a set of guidelines

for enforcing project owner coinpliance

with limitations on ineligible household

occupancy, we recommend that:

the Secretary of Housing and

Urban Development issue explicit

enforcement guidelines for use by

HUD regional and area offices to

deal with project owners who

exceed the limitation on

ineligible households or

otherwise fail to comply with —

HUD's policies on ineligible

occupancy.

140

* 4 7

SHOULD A MORE STRINGENT

LIMITATION BE APPLIED TO PAST

SECTION 8 CONTRACTS?

We believe that the Congress

should consider whether a more stringent

limitation on ineligible households

should be applied to past Section 8

developments already under assistance

contracts.

HUD takes the position that it

Cannot retroactively and unilaterally

raise what is in effect the enforcement

level regarding ineligible households in

existing Section 8 contract units.

Although project owners could argue that

doing so would illegally impair their

contractual rights we believe that since

present law requires that assisted

(contract) units be occupied by eligible

families, owners cannot use the terms of

their contracts to avoid the effect of

141

Statutory requirements. Making owners

seek HUD approval when less than 95%

(instead of 80%) of contracted units are

occupied by eligible households could

cause some added administrative burden,

but owners could be compensated for any

additional costs. Such costs might

easily be outweighed by the benefits of

providing more housing units to needy

households.

The 1,400 units we found in two

areaS seem adequate motivation for a

change, but imore importantly, by the end

of fiscal year 1979, roughly 6,000

Section 8 projects, with more than

450,000 assisted units, had been started

under the new construction and

Substantial rehabilitation portions of

the program. Most of these units are

covered by the earlier regulations

allowing up to 20% of all Section 8

142

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contracted units to be leased to

ineligible tenants without asking HUD for

explicit approval. Since all these units

benefited from nonrecoverable indirect

tax and financing related subsidies, the

bulk of all Section 8 projects have the

potential of being only 80% effective,

but with much higher per-unit subsidy

costs than anticipated.

We do not have the statistics to

accurately estimate the current

nationwide situation, since the Section 8

occupancy data is of uncertain and

varying quality and extensive field work

would be necessary. We also cannot

predict the extent to which Section 8

owners will tend to admit ineligible

(market-rate) households in the future.

What is certain is that the incentives to

do so, and the market forces that make it

possible, will increase as the cost of

143

housing grows and the scarcity of quality

rental housing becomes more prevalent.

If this problem develops. to the point

where many Section 8 owners come to rely

on ineligible households as a significant

part of their tenancy, the political

difficulty of making a retroactive change

will increase proportionately.

A retroactive change such as we

suggest is very likely possible® and

practical since it passes two sensible

tests for a retroactive policy

adjustment. First, it would buttress the

Original intent of the prograin by

maximizing the service of the program to

There is precedent for the Congress

to change the terms of contracts by

legislation (Public Law 96-153, §503,

later repealed). This is admittedly

unusual and subject to challenge, but

could be sustained in the case of a more

stringent limitation on ineligible

households, we believe, since the impact

On project owners is minimal.

144

the intended beneficiaries. Second, it

would not cause any undue hardship on

Section 8 project owners who, after all,

contracted initially to house Section 8

eligible households. The change would

merely reinforce the Government's

consistent position that assisted units

should serve eligible households--that

is, the change is reasonable given the

purpose of the original assistance

contract and the favorable financing

terms afforded housing developers.

Section 8 owners would still have the

ability to serve a broad range of income-

eligible households under current

eligibility rules if their motivation in

admitting ineligible households has been

to provide economic integration. In the

unlikely event that some financial damage

is sustained by a project owner, the

Owner could seek compensation through the

145

courts. If owners find it impossible to

find eligible households, HUD could still

allow owners to rent to market-rate

households, but the path of least

resistance would be for them to seek

eligible households in most situations.

Ineligible households already occupying

Section 8 units would be allowed to

continue renting under existing

provisions of the program regulations

until they voluntarily terminated their

tenancy.

Recommendation for a retroactive policy

adjustment

To maximize service of the

Section 8 program to its intended

beneficiaries, we recommend that the

Congress should consider whether a more

Stringent limitation on ineligible

households should be applied to Section 8

146

projects already under contract. This

could be achieved by either:

enacting legislation to apply a

5% limitation to completed

projects already under contract

directing HUD to change its

regulations to have the same

effect.

Recommendation that the Congress clarify

program intent

Given the confusion regarding

owner's responsibilities to rent only to

eligible households seemingly conflicting

HUD regulations, the complex issue of

economic integration, and other factors

that tend to complicate the problem of

ineligible occupancy, we believe a clear

signal on program intent from the

Congress would make it much easier to set

and enforce HUD policy regarding Section

8 occupancy. We therefore recommend

that:

147

the Congress enact legislation

clarifying the Section 8

program's original intent--that

housing units, for which Section

8 subsidy contracts exist, be

used to the maximum extent

possible for Section 8 eligible :

households.

Copies of this report are being

sent to the Secretary of Housing and

Urban Development and the Assistant

Secretary for Housing-Federal Housing

Commissioner.

Acting Comptroller General of the

United States

148

’ '

Sil rt—'

Department of Housing and

Urban Development

One North Dearborn

Chicago, IL 60602

April 19, 1982

Jeff Watkins, Resident Manager

Arrowhead Village

1912 Cambridge Ct.

Palatine, IL 60067

Dear Mr. Watkins:

We have received correspondence

from Mr. A. F. Barnett of 1936 Cambridge

Court. Mr. Barnett, who is a resident of

Arrowhead Village, indicates that he has

been denied an application for rental

assistance under t!\ federally-funded

Section 8 Housing Assistance Payments

Program. We are deeply concerned since

our records indicate that of the 80 units

149

under you Section 8 Contract, less than

590% (39 units) are currently under lease

to eligible Section 8 tenants.

Current regulations found in 24

CFR Part 883.605(a) require that no more

than 10% of assisted units be leased to

ineligible tenants without prior HUD and

State Agency (IHDA) approval. Failure to

lease to eligible tenants is a violation

of your Contract and constitutes grounds

for all available legal remedies,

including specific preference of the

Contract, suspension or debarment from

HUD program and reduction of the number

of units under the Contract.

Within 10 days following your

receipt of this letter, we request your

written response to the charge made by

Mr. Barnett and a justification of your

failure to lease Section 8 units to

eligible tenants.

150

eee _—. ne

_——7

A copy of this letter is being

forwarded to the Illinois Housing

Development Authority.

Questions concerning this matter

may be addressed to Ollice L. Kirksey,

Occupancy Specialist. (312) 353-6610.

Sincerely,

Elmer C. Binford

Area Manager, 5.15

Departinent of Housing and

Urban Development '

One North Dearborn

Chicago, IL 60602

June 9, 1982

Barbara A. Savot, Manager

Arrowhead Apart.nents

1912 Cambridge Ct.

Palatine, IL 60067

Dear Ms. Savot:

In our letter of April 19, 1982,

we requested a written response to a

complaint by Mr. A. F. Barnett of 1936

Cambridge and your explanation of your

agency's failure to lease Section 8 units

to eligible tenants. Inasmuch as we have

not received additional contacts from Mr.

Barnett, we can assume that his concerns

have been resolved to his Satisfaction.

152

——

eo ee ee ee oe a er ee a ee ee ee

aS ae =

Regarding the matter of your

agency's failure to lease Section 8 units

to eligible tenants, your response

completely ignores this issue. In

addition, you have provided us a copy of

a response to the Barnetts from Donnell

D. Jenkins, Amdur Associates, Inc.,

Property Manager that contains statements

that contradict information contained on

official HUD reports. Specifically, HUD

Forin 52684, Report on Prograin

Utilization, which was filed on behalf of

Arrowhead Apartments, by the Illinois

Housing Development Authority indicates

that as of January 13, 1981 only 39 of 80

units (50%) were leased to eligible

tenants. Further information received by

this office indicates that as of May,

1982, this situation has not improved.

Any unauthorized policy of leasing to

ineligible tenants above the allowable

153

program limit results in the unlawful

deprivation of federally-funded rental

assistance to eligible Section 8

applicants. This policy is especially

disturbing since your agency acknowledges

"a very lengthy waiting list for Section

8 at Arrowhead."

As was indicated in our letter of

April 19, 1982, failure to lease to

eligible tenants is a violation of your

Housing Assistance Payments Contract and

grounds for all available legal remedies.

In addition, your unauthorized

policy has the effect of depriving those

eligible families of their constitution

right to participate in this federally-

funded program.

We request a written response to

this matter within 10 days following your

receipt of this letter. If further

assistance is needed, please contact Mr.

154

Ollice Kirksey, Occupancy Specialist at

(312) 353-6610.

Sincerely,

Elmer C. Binford

_— Area Manager, 5.15

a 155

Department of Housing and

Urban Development

One North Dearborn

Chicago, IL 60602

June 25, 1982

Peter R. Dwars, Deputy Director

Illinois Housing Development Authority

Attention: Daniel R. Delong, Jr.

130 E. Randolph Street

Chicago, Illinois 60601

Dear Mr. Dwars:

Recently, it has come to our

attention that IL06-H121-0907, Arrowhead

Village, has consistently violated

federal regulations by leasing Section 8

units to ineligible tenants in a

percentage that exceeds statutory limits.

We had requested that the owner of this

project provide this office with some

156

a es ee ee ee ee

clarification of this unauthorized

procedure. As the result of our request,

we were informed by an IHDA employee that

your agency would provide an adequate

response.

In a June 15, 1981, letter froin

Mr. Delong, we were provided with a

response that we feel is less than

adequate. We concur in Mr. Delong's

analysis that this project is governed by

regulations that were in effect prior to

February 29, 1980; however, we are not

aware of any federal regulations that

allow a project owner to lease more than

20% of its Section 8 units to ineligible

tenants. ILO6-H121-007 has consistently

leased more than 50% of its Section 8

units to ineliaible families.

157

We would appreciate your response

to this matter inasmuch as our records

show that this project is being managed

in violation of federal regulations.

Sincerely,

Elmer C. Binford

Area Manager 5.15

158

TRANSMITTAL HANDBOOK NO: 4350.3 CHG-1

1-1. PURPOSE. For owners, managers, HUD

Field Office staff and Section 8 Contract

Administrators, this is a one-source

"rule book" on the occupancy policies and

procedures governing the subsidized

multifamily programs listed in Paragraph

1-2. This handbook does NOT supersede

any Contract Administrator or owner

rights and duties that are provided for

in regulations or statutes.

(3) Section 8 New Construction and

Substantial Rehabilitation Units

(a) If the HAP Agreement was signed on

or after October 1, 1981, owners may NOT

admit ineligible families.

(b>) If the HAP Agreement was signed

before October 1, 1981, owners may admit

ineligible families up to the limit

specified in the HAP Contract (i.e., 10%

or 20% of the contract units). This does

159

NOT reguire prior approval from HUD or

the contract administrator, but owners

must first take all of the actions

required by Paragraph 2-7c. q

c. Actions Owners Must Take Before

Admitting Ineligibles .

(1) Admit all available eligible

applicants, unless there is good cause

for denying them assistance. (See 1

Paragraph 2-21). |

(2) Take all reasonable steps to

attract eligible families, including

Qque=

using marketing activities most likely to

attract eligible applicants. |

(3) Place in the files of any

ineligible tenants who are admitted a

written certification that the steps

—

required in (1) and (2) above have been

completed.

160

U.S. DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT SECTION 8 HOUSING ASSISTANCE

PAYMENTS PROGRAM HOUSING FINANCE AND

DEVELOPMENT AGENCIES

ANNUAL CONTRIBUTIONS CONTRACT

Part l

Section 1.1. The Project. The

HFA proposes to enter into a Housing

Assistance Payments Contract (“Contract”)

with respect to newly constructed or

substantially rehabilitated dwelling

units pursuant to an Agreement to Enter

into Housing Assistance Payments Contract

("Agreement") executed prior tc the

commencement of construction or

rehabilitation. The numbers and sizes of

units will be as follows:

Unit Type 1 Bedroom

Number of Units: 44

Size of Unit: 696 S.F.

Contract Rent: $283

Gross Rent: $303

161

a a rr re ee ee tel eel

Unit Type 2 Bedroom

Number of Units: 26

Size of Unit: 897 S.F.

Contract Rent: $328

Gross Rent: $353

The HFA shall enter into an

Agreement and Contract in accordance with

the numbers and sizes of units specified

above. The HFA shall not enter into any

Agreement or Contract or take any other

action which will result in a claim for a

total Annual Contribution in respect to

the Project in excess of the maximun

amount stated in Section 1.4(a).

Section 1.2. Authorization of

Actions by HFA. In order to carry out

the Project, the HFA is authorized to:

(a) enter into and Agreement, (b) enter

into a Contract, (c) make housing

assistance payments on behalf of

Families, and (d) take all other

necessary actions, all in accordance with

162

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a ee ee en ee ee eee

the forms, conditions and requirements

prescribed or approved by the Government;

provided, however, that the HPA shall

take no actions which would result in any

obligation on the Governinent beyond that

provided in the Government approved

Agreement and Contract.

(b) Timely Perforinance of Worx.

The Owner agrees that no later than the

date stated in Section 1.1(b) the work

will be commenced and diligently

continued. In the event the work is not

commenced, diligently continued and/or

completed as aforesaid, the HFA reserves

the right, subject to Government

approval, to rescind this Agreement or

take other appropriate action. The Owner

shall report to the HFA the date work was

commenced and shall thereafter furnish

the HFA with periodic progress reports

163

(quarterly or as otherwise required by

the HFA).

Section 1.3 Construction or

Rehabilitation Period.

(a) Changes. The Owner shall

Submit for HFA approval any changes from

Exhibit A which would materially reduce

or alter his obligations or any changes

which would alter the design or

materially reduce the quality or

amenities of the project. Approval of

such changes may be conditioned on a

reduction of Contract Rents. If such

changes are made without prior approval

by the HFA, the Owner may be required to

reduce the Contract Rents or remedy the

defects or deficiencies as a condition

for acceptance of the project. Contract

Rents may not be increased by reason of

any changes or modifications except those

required by changes in local codes or

164

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a fennel — — | — | —! — | ds sco’

— |

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ordinances made subsequent to execution

of the Agreement, and then only if

Governinent approval is obtained prior to

incorporation of any such changes in the

project. If any changes under this

paragraph are approved by the HFA, the

HFA is required to submit to the

Government, at such times as it deems

appropriate, but not later than the

certification of completion described in

Section 1.4, a statement specifying the

changes approved and either (1) a

certification by the HFA that such

changes do not justify a reduction of

Contract Rents, or (2) a statement of the

amounts by which Contract Rents were

reduced and a certification that such

reduction is appropriate and adequate in

light of the changes approved.

(pb) Commencement of Marketing.

The Owner shall commence and diligently

165

continue marketing as soon as possible,

but in any event no later than ninety

(90) days (or sixty(60) days in the case

of substantial rehabilitation) prior to

the estimated completion date. The Owner

shall notify the HFA of the date of

commencement of marketing. The Owner

Shall also comply with all reporting

requirements under the Affirmative Fair

Housing Marketing Regulations. Not later

than thirty (30) days prior to the

estimated completion “ate and

periodically thereafter, the Owner shall

notify the HFA of any units which he

anticipates will be vacant on the

effective date of the Contract. At the

time the Contract is executed, the Owner

shall submit a list of the dwelling units

leased as of the effective date of the

Contract and a list of the units not so

leased, if any. The Owner will be

166

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— —_— eo Se a

nn mHeHHHHeHEnRaGEnHE 2 = =

entitled to housing assistance payments

for any unleased units pursuant to

Section 1.7(b) of the Contract only if he

has fully complied with the requirements

of this paragraph and the provisions of

that Section.

(bo) Right of Government if HFA

Defaults under ACC or Contract.

(1) If the HFA defaults in the

observance or performance of the

provisions of Section 2.4; fails to

comply with its obligations under any

duly issued Certificate of Family

Participation in accordance with its

terms; fails to comply with the

requirements of Sections 2.5, 2.6, 2.7,

or 2.8; defaults in the performance or

observance of any other term, covenant or

condition of this ACC or of any term,

covenant or condition of any Contract;

fails, in the event of any default by the

167

Owner, to enforce its right under the

Contract by way of action to achieve

compliance to the satisfaction of the

Government or to terminate the Contract

in whole or in part, as directed by the

Government; or fails to comply with the

applicable provisions of the Act and the

regulations issued pursuant thereto; the

Government may, after notice to the HFA

giving it a reasonable opportunity to

take corrective action, determine that

the occurrence of any such event

constitutes a Substantial Default

hereunder as to the Project. Upon the

occurrence of a Substantial Default with

respect to any Project, the HFA shall, if

the Governinent so requires, assign to the

Government all of its rights and

interests under the Contract including

any funds, and the Government shall

continue to pay Annual Contributions with

168

[

i -> = i i L ——— er

respect to dwelling units covered by

Housing Assistance Payments Contracts in

accordance with the terms of this ACC and

of such Contracts until reassigned to the

HFA.

(2) All rights and obligations of

the HFA assumed by the Government

pursuant to this Section 2.16(b) will be

returned as constituted at the time of

such return(i) when the Government is

satisfied that all defaults have been

cured and that the Project will

thereafter be administered in accordance

with all applicable requirements, or (ii)

when the Housing Assistance payments

Contract is at an end, whichever occurs

sooner.

169

U.S. DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT SECTION 8 HOUSING ASSISTANCE

PAYMENTS PROGRAM HOUSING FINANCE AND

DEVELOPMENT AGENCIES

HOUSING ASSISTANCE PAYMENTS CONTRACT

Section 1.3. Families to be Housed, HFA

Assistance.

(a) Families to be Housed. The

Contract Units are to be leased by the

Owner to eligible Lower-Income Families

("Families") for use and occupancy by

such Families solely as private

dwellings.

(b) HFA Assistance.

(1) The HFA hereby agrees to make

housing assistance payments on behalf of

Families for the Contract Units, to

enable such Families to lease Decent,

Safe, and Sanitary housing pursuant to

Section 8 of the Act. Such housing

assistance payments shall equal the

170

eee Eee o—=

difference between the Contract Rents for

units leased by Families and the portion

of such rents payable by Families as

determined by the Owner in accordance

with schedules and criteria established

by the Government.

(2) If there is an Allowance for

Utilities and Other Services and if such

Allowance exceeds the Gross Family

Contribution, the Owner shall pay the

Family the amount of such excess on

behalf of the HFA upon receipt of funds

from the HFA for that purpose.

Section 1.5. Annual Contributions

Contract.

(a) Identification of Annual

Contributions Contract. The HFA has

entered into an Annual Contributions

Contract with the Government, as

identified in Section 1.1(f), under which

the Government will provide financial

171

assistance to the HFA pursuant to Section

8 of the Act for the purpose of making

housing assistance payments. A copy of

the ACC shall be provided upon reguest.

(b) HFA Pledge of ACC Payments.

The HFA hereby pledges to the payment of

housing assistance payments pursuant to

this Contract the annual contributions

payable under the ACC for such housing

assistance payments. The HFA shall not,

without the consent of the Owner, amend

or modify the ACC in any manner which

would reduce the amount of such annual

contributions, except as authorized in

the ACC and this Contract.

Housing Assistance Payments Contract.

The approval of this Contract by the

Government signifies that the Governinent

has executed the ACC and that the ACC has

been properly authorized; that the faith

172

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Cc cr co eo ® ' :

mm ‘er ee bis) nH Hm ewww =

of the United States is solemnly pledged

to the payment of annual contributions

pursuant to said ACC; and that funds have

been obligated by the Government for such

payments to assist the HFA in the

performance of its obligations under the

Contract.

Section 1.12. Reduction of Number of

Contract Units for Failure to Lease to

Eligible Families.

(a) After First Year of Contract.

If at any time, beginning six(6) months

after the effective date of this

Contract, the Owner fails for a

continuous period of six (6) months to

have at least eighty percent (80%) of the

Contract Units leased or available for

leasing by Families, the HFA, with

Government approval, may on thirty (30)

days' notice reduce the number of

Contract Units to not less than the

173

number of units under lease or available

for leasing by Families plus ten percent

(10%) of such number if the number is ten

(10) or more, rounded to the next highest

number.

(b) At End of Initial and Each

Renewal Term. At the end of the initial

term of the Contract and of each renewal

term, the HFA, with Government approval,

may, by notice to the Owner, reduce the

number of Contract Units to not less than

(1) the number of units under lease or

available for leasing by Families at that

time or (2) the average number of units

so leased or available for leasing during

the last year, whichever is the greater,

plus 10 percent (10%) of such number if

the number is ten (10) or more, rounded

to the next highest number.

Government will agree to an amendment of

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the ACC to provide for subsequent

restoration of any reduction made

pursuant to paragraph (a) or (b) of this

Section if the Government determines that

the restoration is justified as a result

of changes in demand and in the light of

the Owner's record of compliance with his

obligations under the Contract and if

annual contributions contract authority

is available; and the Government will

take such steps authorized by Section

8(c)(6) of the Act as may be necessary to

carry out this assurance (see Section

1.6).

Section 2.7. Failure or Inability of HFA

to Comply with Contract. The following

provisions of the ACC are hereby made a

part of this Contract:

"(a) Rights of Owner if HFA

Defaults.

175

(1) In the event of failure of

the HFA to comply with the Contract with

the Owner, or if such Contract is held to

be void, violable or ultra vires, or if

the power or right of the HFA to enter

into such Contract is drawn into guestion

in any legal proceedings, or if the HFA

asserts or claims that such Contract is

not binding upon the HFA for any such

reason, the Government may, after notice

to the HFA giving it a reasonable

opportunity to take corrective action,

determine that the occurrence of any such

event constitutes a Substantial Default

hereunder. When the Government so

determines, it shall have the right to

assume the HFA's rights and obligations

under such Contract, perform the

obligations and enforce the rights of the

HFA, and exercise such other powers as

the Government may have to cure the

176

Default; however, whether or not the

Government elects to proceed in this

manner, the Government shall, if it

determines that the Owner is not in

default, continue for the duration of

such Contract to pay Annual Contributions

for the purpose of making housing

assistance payments with respect to

dwelling units under such Contract.

(2) All rights and obligations

of the HFA assumed by the Governinent

pursuant to this Section 2.16(a) will be

returned as constituted at the time of

such return (i) when the Government is

Satisfied that all defaults have been

cured and the Project will thereafter be

administered in accordance with all

applicable requirements, or (ii) when the

Housing Assistance Payments Contract is

at an end, whichever occurs sooner.

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(3) The provisions of this

Section 2.16(a) are made with, and for

the benefit of, the Owner, the HFA (but

only in its capacity as Lender), or the

Owne ~'s other assignees, if any, who will

have been specifically approved by the

Governinent prior to such assignment. If

Such parties are not in default, they

inmay, in order to enforce the performance

of these provisions, (i) demand that the

Government, after notice to the HPA

giving it a reasonable Opportunity to

take corrective action, make a

determination whether a Substantial

Default exists under paragraph (a)(1) of

this Section, (ii) if the Government

determines that a Substantial Default

exists, demand that the Government take

action as authorized in paragraph (a)(1l),

and (iii) proceed against the Government

by suit at law or in equity."

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Section 2.9. Remedies Not Exclusive and

Non-Waiver of Remedies. The availability

of any remedy provided for in this ACC or

in the Contract shall not preclude the

exercise of any other remedy under this

ACC or the Contract or under any

provisions of law, nor shall any action

taken in the exercise of any remedy be

deemed a waiver of any other rights or

remedies. Failure to exercise any right

or remedy shall not constitute a waiver

of the right to exercise that or any

other right or remedy at any time.

179

Exhibit A

DEPARTMENT OF HOUSING AND URBAN

DEVELOPMENT

17 North Dearborn Street

Chicago, Illinois 60607

December 23, 1975

Mr. Irving Gerick, Director

Illinois Housing Development Authority

201 N. Wells Street

Chicago, Illinois

Dear Mr. Gerick:

Supject: Section 8 Proposal IL06-H121-

007, Hawthorne Ridge Apts., Woodridge

You are hereby notified that this office

has approved your/amended proposal, dated

12/12/75, to provide 176 Units of housing

of which 70 Units are to be the subject

of a contract for the making of housing

180

assistance payments on behalf of eligible

lower-income families leasing such units.

A reservation of annual contributions

contract authority for this project in

the amount of $291,089 is in effect.

This is an increase of $170,585 from the

amount previously reserved as stated in

your Notification of Application Approval

dated 7/18/75. Subject to the

fulfillment of all administrative and

statutory requirements, an Annual

Contributors Contract will be prepared

and executed covering the number and size

of units described below:

Unit No. of Contract

Size Units Rents

1 BR 44 $283

2 BR 26 328

This approval is based upon your

proposal as submitted, including the

181

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financing certifications required by 24

CFR Section 883.205(b). If, at any time,

you make changes, including changes to

your financing methods which would affect

the correctness of any element of the

financing certifications, you must submit

such changes to this office for review

and approval.

This approval supercedes the

previous project approval of 35 assisted

units, or 20% of the project, dated {

9/30/75.

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.