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CARMICHAELS ARBORS ASSOCS. v. UNITED STATES

April 14, 1992

CARMICHAELS ARBORS ASSOCIATES, a Pennsylvania Limited Partnership, Plaintiff,
v.
UNITED STATES OF AMERICA, acting through the Department of Housing and Urban Development, Defendant.



MEMORANDUM OPINION

Plaintiff Carmichaels Arbors entered into a Housing Assistance Payment contract ("HAP contract") with the United States Department of Housing and Urban Development to construct an apartment complex in Greene County, Pennsylvania, for low-income elderly and handicapped persons. HUD was authorized to enter into HAP contracts under Section 8 of the United States Housing Act of 1937, as amended, codified at 42 U.S.C. § 1437(f).

The Section 8 program was designed to provide housing for low-income persons through the use of private sector developers or through the use of local public housing authorities. The rent paid varied according to the individual tenant's income. HUD paid an additional sum to the owner to make up the difference between what the tenants were required to pay and what rents could have been collected if the owner rented the housing in the open market. In this case, the means of calculating HUD's payment to the owner is at the foundation of the dispute.

 Under Section 8, the initial rent for a unit is to be established using a "fair market rental" analysis conducted by HUD. 42 U.S.C. § 1437f(c)(1). HUD is also directed to make periodic adjustments to the payments made to the owner:

 
The assistance contract shall provide for adjustment annually or more frequently in the maximum monthly rents for units covered by the contract to reflect changes in the fair market rentals established in the housing area for similar types and sizes of dwelling units or, if the Secretary determines, on the basis of a reasonable formula.

 42 U.S.C. § 1437f(c)(2)(A). At the time that HUD and Carmichaels Arbors entered into the HAP contract, section 8 also contained the following provision:

 
Adjustments in the maximum rents as hereinbefore provided shall not result in material differences between the rents charged for assisted and comparable unassisted units, as determined by the Secretary.

 42 U.S.C. § 1437f(c)(2)(C)(West 1978)(before amendments).

 The HAP contract between the parties specified that HUD would make adjustments according to Automatic Annual Adjustment Factors (AAAFs), which were to be published in the Federal Register. *fn1" The use of the AAAFs was authorized in 42 U.S.C. § 1437f(c)(2)(A), which permitted the Secretary to make adjustments according to a "reasonable formula." In the same section of the contract, a subsection entitled "Overall Limitation" was included. This overall limitation clause reiterated the qualification expressed in 42 U.S.C. § 1437f(c)(2)(C) that rents paid under the HAP contract should not materially exceed rents for similar unassisted rental units.

 For the first several years of the contract period, HUD made adjustments in the rent levels using the published AAAFs. For the period beginning on February 19, 1987, however, HUD sent Carmichaels a payment lower than an application of the AAAFs would have produced. HUD claims that the rents produced by an application of the AAAFs at that time would have materially exceeded the rents that the property would have generated if it had been an unassisted rental property. HUD claims that this result was prohibited under 42 U.S.C. § 1437f(c)(2)(C) and under the corresponding contract provision in the HAP contract.

 HUD has not disclosed how it made the initial determination to investigate whether the rent paid to a given property exceeded rents for similar unassisted units. In its briefs, HUD contends that it conducted "spot checks" on rents whenever it had "reason to believe that the AAAF-level rent increases might be excessive." HUD's Reply Brief at 10. These spot checks, or comparability studies, were conducted by HUD field staff. The staff members examined rents at three, four, or five unassisted units that were used in determining the initial rent for the assisted unit, or, if the original units were no longer available or comparable, then the field staff used other comparable projects located in the same general geographic region. Then, using acceptable appraisal techniques, the HUD field staff members adjusted the rents of each comparable project, and compared these rents against what the AAAF would produce. If there were no material differences, the AAAF rent would be applied as usual; otherwise, the rent for the assisted unit was reduced. Tahash Declaration at 2-3.

 Apparently this was the procedure used to arrive at the rent reduction for Carmichaels Arbors. Carmichaels Arbors protested the rent reduction and a series of letters were exchanged. In 1988, Carmichaels Arbors' position was strengthened with the filing of the decision in Rainier View Assoc. v. United States, 848 F.2d 988 (9th Cir. 1988). In the Rainier View court's analysis, HUD was required under the terms of the HAP contract to use the AAAFs because it considered HUD to have elected a formula method of calculating adjustments. The use of the comparability studies was seen as an independent basis for determining annual rent adjustments and was adjudged to violate the owner's right to a calculation based on the AAAFs. HUD considered Rainier View to have been wrongly decided and declined to follow its holding outside of the Ninth Circuit. Accordingly, HUD refused to apply the Rainier View holding to Carmichaels Arbors because it was located in Pennsylvania. Carmichaels Arbors filed suit on November 7, 1989.

 One month following the Rainier decision, Congress enacted the Department of Housing and Urban Development Reform Act of 1989, Pub. L. No. 101-235, 103 Stat. 1987 (1989). Although the primary impetus for this legislation appears to have been to address a scandal at HUD involving the improper allocation of housing construction contract awards, the legislation also addressed a number of other topics. Section 801 of that act amended 42 U.S.C. § 1437f(c)(2)(C), the overall limitation provision, at least in part as a response to the ruling in Rainier View. The amendment operated prospectively to authorize the use of comparability surveys as an independent method of adjusting rent:

 
In implementing the [overall] limitation . . . the secretary shall establish regulations for conducting comparability studies for projects where the secretary has had reason to believe that the application of the formula adjustments under ...

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