Affordable Housing Statutes Affected a Taking

Federal Circuit

In a victory for NAHB's multifamily housing members, the United States Court of Appeals for the Federal Circuit ruled recently that federal legislation that eliminated property owners' contractual rights to prepay mortgage loans on low-income housing projects affected a taking of property rights requiring "just compensation" under the 5th Amendment of the U.S. Constitution. The Multifamily area approached the NAHB Legal Action Committee and was granted funding for a coalition litigation effort in this case in 1999.

In Cienega Gardens v. United States (Fed. Cir. No. 02-5050 (June 12, 2003)), a case that has been appealed multiple times throughout the federal court system, the Federal Circuit found that the 1987 Emergency Low-Income Housing Preservation Act (ELIHPA) and the 1990 Low-Income Housing Preservation and Resident Homeownership Act (LIHPRHA) went "too far" in interfering with the owners' contractual and property rights. The property owners are real estate developers who had entered into contracts with private lenders for forty-year loans to build low-income housing under the National Housing Act. To facilitate the loans, the Department of Housing and Urban Development (HUD) provided mortgage insurance and required each participant to enter into regulatory agreements with HUD.  Under the regulatory agreements and associated contract documents, the property owners were restricted as to rental rates and rental income and were barred from selling or further mortgaging the properties without HUD approval. However, the agreements also permitted the owners to prepay their mortgages after twenty years without HUD approval and thereby exit the housing programs.

Upon learning in the late 1980's that many owners were preparing to prepay their mortgages after expiration of the impending twenty-year provision, Congress enacted ELIHPA (1987) and LIHPRHA (1990) to impede the wholesale removal of properties from the low-income housing pool. The federal statutes prohibited prepayment of the loans without HUD approval and conditioned the approval on a showing that prepayment would not "materially increase economic hardship for current tenants." The immediate effect of ELIHPA and LIHPRHA was to nullify the property owners' option to prepay their mortgages after twenty years and regain their traditional rights to lease the properties at market rates.  Although Congress subsequently lifted the prepayment ban by federal statute in 1996, the property owners were effectively prohibited from exercising their prepayment options for nearly eight years.

After confirming the owners' vested property interests, the Federal Circuit applied the "Penn Central factors," derived from the U.S. Supreme Court case of Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), which examine the character of the governmental action, the economic effect of the regulation on the property owner, and the extent to which the regulation interferes with the owners' "distinct investment-backed expectations." Based on this evaluation, the Court found that ELIHPA and LIHPRHA affected compensable, temporary, regulatory takings of the subject properties.  

9th Circuit

A related issue was addressed under the same federal statutes at issue in the Cienega Gardens case allowing a landowner to receive a subsidized 40-year mortgage on rental property after agreeing to charge below-market rates and then exiting the program after 20 years by prepaying the mortgages.  In TOPA Equities Ltd. v. Los Angeles (9th Cir., No. 02-56-034, 9/8/03), a landowner argued that because it had prepaid its 40-year mortgage and exited the federal rent-control program, Los Angeles could no longer require it to keep the property below market value.  The court disagreed, holding that while the LIHPRHA's preemption clause is applicable to the situation, the local ordinance does not limit the ability to prepay the mortgage.  Therefore, once a landowner exits the federal program, he is then subject to state or local laws that regulate rents.  The Court distinguished this ordinance from that of the 8th Circuit's recent preemption opinion in Forest Park II v. Hadley, 336 F3d 724 (8th Cir. 2003). [ return to top ]