Just as is the case with market rate apartment buildings, sometimes HUD multifamily projects go into financial default and foreclosure. In most cases, HUD takes back these projects and offers them to the highest qualified bidder through a foreclosure sale. The concern for tenants is whether the buildings will remain as affordable after foreclosure as they were before.
We’ve been fortunate in Minnesota, in that until recently, no HUD projects had gone into foreclosure in the last two decades. However, in the last six months, four Minnesota HUD projects entered foreclosure, perhaps a reflection of the current economy. Fortunately, HPP already had expertise in this area, having assisted advocates in other areas of the country attempting to preserve the affordability of distressed HUD projects. In fact, HPP authored a study looking at how often HUD maintains Section 8 contracts when foreclosing. What HPP found was that despite a congressional directive to continue Section 8 contracts on foreclosed projects (the Schumer Amendment), in existence since 2005, in 44% of the projects going through foreclosure the prior Section 8 contract no longer existed afterwards. Termination of Section 8 contracts typically mean very substantial rent increases for most tenants.
There is another problem in maintaining affordability of these projects as well, typified by Shingle Creek Towers, a HUD building in Brooklyn Center, Minnesota. Aside from Section 8 contracts in some cases, HUD projects usually also have Use Agreements, which restrict rents and which ensure units go to low income tenants. These Use Agreements can vary considerably, however, in how much they control rents; in some cases the rent limits are set so high as to be meaningless. Such is the case with Shingle Creek Towers, one of the Minnesota HUD projects entered foreclosure. In this case the tenants, represented by HPP, sued HUD for failing to ensure adequate rent protections going forward. Despite the existence of a federal statute calling for HUD to maintain the same level of rent restrictions going forward after foreclosure as before, HUD announced its intention to apply use agreement terms which would liberalize rent restrictions to levels well above those that existed prior. HUD’s disregard of these statutory protections appeared to be a national policy; the inadequate protections of HUD’s proposed Use Agreement for Shingle Creek have been showing up in HUD Use Agreements across the country.
There is yet another risk to tenants in the apartment building foreclosure process, who may become the building owner and their new landlord. In the case of Shingle Creek, HPP learned that HUD was negotiating a purchase with the high bidder at the foreclosure sale; in this case, a Mr. Emmanuel Ku. HPP investigated and learned that Ku is a notorious New York City landlord with thousands of serious code violations connected to his properties. When HUD Secretary Shaun Donovan worked for New York City he successfully lobbied HUD to block further sales to Ku based on his dismal track record. However, Ku has continued to bid on other HUD foreclosures around the country and in several cases HUD has agreed to sell him the projects. When HPP uncovered this information, it worked with the tenants and allies like HOME Line to persuade public officials and other interested parties to write to HUD objecting to any sale to Ku. In this case, HUD eventually did the right thing, rejecting Ku as a qualified bidder.
Meanwhile, HPP was able to engineer a successful settlement to the Shingle Creek lawsuit. When local nonprofit Aeon successfully bid to buy the project. HPP was able to negotiate affordability terms with Aeon that provided the tenants much more protection than HUD’s Use Agreement would have. That then enabled HPP to settle their lawsuit with HUD. HPP successfully negotiated an unusual settlement term: that in return for HPP agreeing to dismiss the lawsuit, HUD agreed to hold a high level meeting between top HUD officials and a small group of national preservation advocates, including HPP. The purpose of the meeting was to discuss several ideas the advocates had to improve HUD practices with respect to troubled projects. That meeting has since taken place; time will tell whether this will ultimately lead to changes in HUD practices.