Tenants and their advocates have worked for years to establish legally enforceable rights to maintain the affordability of HUD apartment buildings.  But for two decades now the primary federal program to produce new affordable rental units has been the Low Income Housing Tax Credit program (LIHTC), and the courts have not yet addressed issues around retaining these properties in the LIHTC program.  A recent ruling by the Oregon Court of Appeals now breaks new ground to establish tenant rights in this important area.  In Nordbye v. BRCP/GM Ellington, 246 Ore. App. 209, 266 P.3d 92 (Ct App. Ore. 2011), the Court of Appeals reversed the District Court and held that tenants have legally enforceable rights through the restrictive covenants recorded for all tax credit properties.

The tenants in Rose City, a 264 unit tax credit building in Portland, filed suit in 2007 (assisted by HPP).  The Oregon state housing finance agency had grown frustrated with repeated noncompliance with program rules by the owner, and had concluded that the solution was to remove the project from the tax credit program.  The owner suddenly found itself with a market rate and much more valuable property, and sold the building.  The new owner sought to upgrade the building and proceeded to evict all the low income tenants.  From the point of view of the tenants, the agency’s actions amounted to rewarding bad behavior, with disastrous consequences for the low income residents.  The tenants sought to block the evictions and to restore the project to the tax credit program, arguing that the agency and the previous owner could not unilaterally agree to remove the program from the program, without the consent of the residents, as required in the restrictive covenants recorded against the property.  The trial court ruled against the tenants, finding that the state agency’s interpretation of the federal tax credit statute was entitled to deference and the court should not second guess the agency.

On appeal, the Court of Appeals reversed.  The state agency was not entitled to deference in its interpretation of the statute, since it relied not on any formal pronouncement by the IRS (the agency overseeing tax credits), but on a phone call to an IRS employee.  The Court then went on to review the use restrictions upon which the tenants were relying.  The Court held that tenants were explicitly third party beneficiaries of the use agreement so that the agency and owner could not unilaterally terminate project participation in the tax credit program without their consent.  The Court also held that this result was consistent with the intent of the Tax Credit statute.  As far as we know, this is the first ruling of its kind in the country, and it sends a powerful message that tenants have legally enforceable rights to protect their apartments from removal under the Tax Credit program.  Along with the National Housing Law Project, HPP assisted the tenants’ lawyers throughout the case.