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When HUD Buildings Go Into Foreclosure
Shingle Creek Apartments in Brooklyn Center, Minnesota, is a HUD subsidized apartment building housing low income tenants which is also now in foreclosure.  The big question: Will it come out of foreclosure as affordable as it was going in?

Industry observers have long expected the financial distress in the single family housing market to spread into the multifamily market next.  Recent indications are that HUD subsidized apartment buildings will not be immune from this financial distress.   Minnesota had not seen a HUD subsidized multifamily property go into foreclosure for twenty years; now all of a sudden Shingle Creek Apartments is one of four such Minnesota properties in or nearing foreclosure.

For some time now HJC has been assisting attorneys around the country in dealing with financially troubled HUD properties.  Usually the issue has been whether HUD would be continuing the project-based Section 8 contract for buildings going through foreclosure.  Unfortunately, despite Congressional directives to continue section 8 contracts in such circumstances, in too many cases HUD seeks to terminate the contract, leaving the property after foreclosure considerably less affordable than it could have been.

Shingle Creek presents a different affordability problem.  In a building with no Section 8 contract, HUD announced that any buyer at a foreclosure sale would have to comply with ongoing use restrictions as to rents and income levels of tenants.  However, the restrictions imposed would allow considerably higher income and rent limits than previously existed.  In April 2010, HJC (then known as HPP) wrote to HUD pointing out that federal law required that the previous level of restrictions existing be continued in the new use restrictions.  The proposed restrictions, HJC noted, would allow monthly rent increases of over $200.  In response, HUD withdrew the foreclosure sale notice with the proposed use restrictions, and as of this writing (August 2010) we are still waiting for HUDís final determination.  There are some indications that HUD has followed a similar practice with other foreclosures around the country, so it may be a nationwide practice that HUD is reconsidering.