# Appendix — Price v. Pierce

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0540%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1988
- **Citation:** 485 U.S. 960

## Text

—

Ne ee a a ee ee eo es er ce or

(7
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

THE FOLLOWING PAGES WERE POOR HARD COPY
AT THE TIME OF FILMING. IF AND WHEN A
BETTER COPY CAN BE OBTAINED, A NEW FICHE
WILD BE ISSUED,

du the

United States Court of Appeals

Bor the Seventh Cirrntt

No. 86-1906
AUDREY PRICE, et al.,
-Plainttffs-Appellants,
v.
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

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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

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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

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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

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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

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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,

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- 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

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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

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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

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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.

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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

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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-

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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,

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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.

15

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

16

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c

, use —
nnn mkmhHeHn

matte eee
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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.

17

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

18

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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.

19

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

20

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

21

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

22

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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

23

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

24

ee

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,

25

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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

26

-

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-

27

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

28

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PHRHeHeHRHEHHHHHhH &

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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

29

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

30

a

~~ nenmntHHHHHeHEeHEgl: &

_—

;

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

31

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

32

I.

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rm

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

a3

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.

34

— ne mee amen, — = =_ __

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,

35

"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,

36

’ _—
=

. ©

'
i

.

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

37

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

38

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

39

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,

40

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.

41

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

42

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:

43

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:

45

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

46

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

47

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

48

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,

49

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.

50

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

Sl

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

52

:
:
I
.
.
.
.
.
a
a
a
a
a
a
=

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

53

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

54

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

55

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

56

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

57

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

58

s,

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

59

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.

60

re

|

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

61

ee ec eit ks at

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

62

Oe cen cee eee ee ee ee ee ee ee ee ee ee ee
innnkenHeHHHHeHeHeEeEhmm ts

— oe eee

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

63

hy
™
a

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

64

eon o_o l em) a | —_—""s a.

}

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.

65

(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.

66

a=_ FS PES oe

]

lee 0 eed
ee ee
patos

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

67

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

68

-

]
I
]
]
I
|
I
I
I
1

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."

69

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

70

—

a

i

SES =F = |e ee

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

71

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

72

‘aa 2 es
i HRmReaHeHeEeEHEEEeEEeEHB& = =

/

vaomesesadh

ll —" —" — ‘aeons gue RI merits pea eel Cocca call amet mane

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

73

a

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

74

=

a. ="

— —

-

ke

a

ee EE eee OE eee es OO ees Oe ee 1 f }
mmm mimi mr mre re eee

ee |

such agencies may enter into contracts to
make assistance payments to such owners

Or prospective owners.

75

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

EE |

unlawfully withheld or unreasonably

A

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;

76

fs ee ee ees OO ee ee ee ee ee ee
nBmnmnmnEneHe &

(C) in excess of statutory
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.

77

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.

78

|

_=— = = Oe Oe
ve ae eeene ee ee

=

ww SS

———_

——

a

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.

79

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.

82

'

SES ={_ = FS] FSI Pee oer
eT eeee ee

ee

—

—

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,

83

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.

(c) HUD will agree to an
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

84

—

a
ae lcelhlelhlUcreerlCc crllUCUrelUrelUrcelUcelhUmLe Uc. UL. Ure. Ure

steps authorized by section 8(c)(6) of
the Act as may be necessary to carry out

this assurance (see §883.203).

85

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.

86

re

EE

f

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

87

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,

88

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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

89

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.

90

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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.

91

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

92

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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.

93

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.

94

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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

95

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

96

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.

97

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

98

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

99

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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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

i,

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

1!

1

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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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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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

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= = - = ‘

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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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
or

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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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

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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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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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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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0540%3A2. Public record. Not legal advice.