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HPP Settles Lawsuit, Preserving 5 Projects & 131 Units of Rural Rental Housing
03.08.2011 - HPP

HPP recently settled a lawsuit in Federal District Court in Minnesota which will ensure that five apartment buildings in the Willmar / Alexandria area will remain affordable indefinitely.  What’s most remarkable is that these projects could be saved after the owners had illegally removed them from the Rural Development program, and after the Rural Development agency gave up on making the owners comply with the law.

First, some background:  Under certain circumstances owners of Rural Development (RD) Section 515 apartment buildings can prepay their RD mortgages and convert their properties to market rate rents.  In order to do so, however, those owners must apply to RD for permission to prepay, and then subject themselves to an elaborate process which includes a combination of incentives to induce the owner to stay in the program, and restrictions on the owner’s right to prepay (including protections for tenants).

The owners of a group of 7 RD properties in the Willmar / Alexandria area, totaling 167 units, had other ideas, though.  They wanted out, but decided the prepayment  process seemed too onerous, and so they devised a way to try to circumvent the law.  The owners simply stopped complying with all RD requirements—they stopped making mortgage payments to RD, they stopped filing reports, and they even denied RD access to the properties.  What the owners were counting on is that RD would declare them in default under their mortgages, and would then take the usual first step toward foreclosure, which is to accelerate the balance due on the loans, declaring the full balance immediately due and owing.  The owners were then prepared to tender full payment in response, which would mean that suddenly their properties would be free of the RD program, without any of the restrictions or tenant protections that the law required.
 
RD recognized what the owners were attempting to do, and rather than accelerate the loans, RD threatened various kinds of legal actions against the owners for their deliberate defiance of all program requirements.  Unfortunately, over the next nearly three years, RD failed to follow through on any of those threats, nor did the agency take any action to compel the owners to operate their buildings as low income housing under the Section 515 program.  The owners hustled up some Section 8 vouchers to replace the subsidies they’d lost under the RD program, and otherwise, operated their properties as market rate housing—illegally.

RD eventually became concerned over the fate of the tenants, and contacted HPP.  Working with HOMELine, HPP investigated and then demanded that the owners immediately bring themselves back into compliance with the program, roll back illegally imposed rent increases, and pay back tenants for excess rents they’d charged.  In the meantime, however, RD decided that attempting to get the owners to comply was just too difficult, and that the government was going to give up and let the owners operate these properties as market rate housing.

On behalf of the tenants and HOME Line, HPP filed suit in federal court to block that action by RD, and to force the owners back into compliance.  (Two of the seven properties HPP agreed to dismiss from the lawsuit.)  Immediately after the suit was filed, RD and the owners both agreed to halt any further action while the parties considered possible settlement.  HPP urged the owners to sell the projects to a nonprofit owner committed to keeping them in the RD program.  Eventually, that’s what happened; the owners transferred the five projects to Southwest Minnesota Housing Partnership, thus restoring them to the Section 515 program.  RD provided the federal resources to subsidize rents on all the units, and to fund necessary rehab work.  In addition, the owners agreed to pay the tenants, co-plaintiff HOME Line, and HPP $50,000 in damages and attorney fees.  In the end, the projects were saved, and owners contemplating an end run around the legal process were sent a clear message.